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Oil recovers after three-day slump, US Fed rate hike recovers effect; what lies ahead


Oil prices rose slightly higher on May 4, but were unable to offset much of this week’s drop of more than 8 percent as demand in major consuming countries continued to weigh.

Earlier in the day, Brent oil futures rose 73 cents, or 1.01 percent, to $73.06 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 49 cents, or 0.71 percent, rose to $69.09 after falling earlier in the session to $63.64, the lowest since December 2, 2021.

Oil prices fell more than 8 percent this week on concerns about the US economy and signs of weak output growth in the world’s largest oil importer China, while also falling further after the US Federal Reserve hiked interest rates on May 3.

The US Federal Reserve under Chairman Jerome Powell raised the target range for the federal funds rate to 5 to 5-1/4 percent, continuing its path to maximum employment and 2 percent inflation.

After the interest rate hike, investors worried about a weakening global economy that could affect energy consumption. The move weighed on oil prices as Brent futures fell 76 cents or 1.1 percent to $71.57 a barrel and US WTI fell 1.5 percent to $67.60 a barrel. Both benchmarks are down more than 10 percent since the beginning of the week.

Russia intends to cut oil production until the end of the year

The Organization of Petroleum Exporting Countries (OPEC) and allies including Russia – the OPEC+ cartel – began voluntary cuts in oil production early this month. Lower oil supply could lead to tighter markets and higher oil prices in the long run.

Earlier in the day, Russian Deputy Prime Minister Alexander Novak announced that Russia is fulfilling its voluntary pledge to cut oil production by 500,000 barrels per day (bpd) from February to the end of the year. Novak added that a two-thirds reduction in Russian oil pipeline exports to the European Union was only partially offset by seaborne exports.

Russia is the world’s largest exporter of crude oil and oil products combined, producing more than 10 million barrels of oil per day. Before Russia’s invasion of Ukraine, the European Union was importing 2.2 million barrels a day of crude oil from Russia and 1.2 million barrels a day of refined oil products, according to the International Energy Agency (IEA) – a Paris-based bureau meeting of the 31 mostly industrialized countries and much of the EU.

Where are oil prices headed?

The US Fed has indicated it may suspend further rate hikes to give officials time to assess the impact of recent bank failures and gain clarity on the dispute over raising the debt ceiling. The market has received some support from this position.

For further rate hikes, Fed Chairman Jerome Powell will take a data-dependent approach to determine upcoming rate decisions.

“With the Fed potentially pausing, the debt ceiling hopefully lifted this month, the OPEC+ cut being felt in a few weeks and global demand picking up in the second half of the year, we are growing convinced that demand is no matter how low oil prices will fall, but for how long,” Tamas Varga of the oil broker PVM said, according to Reuters.

Analysts are largely predicting that after OPEC+’s supply restriction, oil prices could rise again later this year to the $100 per barrel level, last seen in July 2022. Investors are also awaiting developments from the European Central Bank, which is about to to raise interest rates. for the seventh consecutive meeting.

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Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.