Global oil prices continue to fall as rising interest rates worldwide stoke fears about global economic activity and demand prospects.
Global Interest Rates and Oil Prices
Oil prices are on a downward trend as the world grapples with rising interest rates. The hikes, more aggressive than anticipated, have been implemented by major central banks, including the Bank of England and the Bank of Norway, to combat inflation. The Federal Reserve in the United States has also hinted at further rate increases. These actions have sparked fears of a global recession, which could dampen demand for oil. Consequently, the dollar index recently rose above 102.5, extending gains from the previous session (see chart section).
Unexpected Reduction in U.S. Oil Stocks
Despite the gloomy outlook, there was an unexpected reduction in U.S. oil stocks last week. Analysts had predicted a small increase, but the Energy Information Administration (EIA) reported a decrease of 3.8 million barrels. While this should have bolstered oil prices, the market seems more focused on the aggressive stance of central banks.
Russian Oil Production
On the supply side, despite Russia's commitment in February to cut its production by around 500,000 barrels per day, data on Russian oil exports and domestic crude oil processing have not shown a significant decrease so far. If Russia continues to produce more oil than agreed, it could undermine the credibility of the expanded oil cartel and potentially affect Saudi Arabia's willingness to continue its voluntary production cuts.
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Summary
The oil market is currently under pressure, with high global interest rates posing a significant risk to economic prospects and inflation proving more stubborn than hoped. As we move into the second half of the year, the question remains: Where is the peak of these rates, and how long will they be maintained? How will these factors, along with supply issues like Russia's production levels, shape the future of oil prices?
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Sébastien Bischeri,
Oil Trading Strategist