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Oil Price Slides Amid Higher Interest Rates

Oil pump jacks are seen at the Vaca Muerta shale oil and gas deposit in the Patagonian province of Neuquen, Argentina, January 21, 2019. REUTERS/Agustin Marcarian/File Photo

BNR – Oil fell for an additional day on Friday and seemed on track for a weekly drop. The decline is a consequence of a UK interest rate rise which increased concerns about economic growth.

Economic growth overshadowed decreased US crude reserves and other signals of supply tightening.

On Thursday, both crude benchmarks fell by around $3 after the Bank of England increased interest rates. The bank increased interest rates by a larger-than-expected half-point. Norway and Switzerland both raised interest rates.

By 1110 GMT, Brent crude had fallen 91 cents, or 1.2%, to $73.23 per barrel. However, West Texas Intermediate (WTI) crude in the United States was down $1.22, or 1.8%, to $68.29.

“After yesterday’s central banks’ action, anxiety has palpably grown,” said Tamas Varga of oil broker PVM.

“Due to strengthening economic headwinds caused by recession fears,” he added. “only conspicuous stock depletion will herald a protracted change in the currently ominous outlook.”

High Interest and Pressure on Oil Market

High-interest rates raise the cost of borrowing for both firms and people. This might hamper economic development and muddle the picture for oil consumption for the remainder of the year.

The threat of more US interest rate rises exacerbated those challenges. US Federal Reserve Chair Jerome Powell indicated this week that two more 25-basis-point rate rises by the end of the year were “a pretty good guess.”

Gains in the dollar, fuelled by hawkish statements from major central banks, also weighed. A strong dollar raises the price of oil for holders of other currencies. It may also have an impact on demand and suggest increased risk aversion among investors.

The recession and concerns about demand overshadowed any signals of supply-side constraint. According to this week’s US inventory report, oil reserves fell by a shocking 3.8 million barrels.

Saudi Arabia’s production reduction of 1 million barrels per day declared in July, together with an OPEC+ agreement to cap supply through 2024, is also expected to pressure the market.


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