Oil futures head lower on Tuesday as the Federal Reserve prepares to kick off a two-day policy meeting that’s expected to result in another supersize rate increase that could eventually lead to a slowdown in energy demand.
West Texas Intermediate crude for October delivery
the most actively traded contract, was down $2.30, or 2.7%, at $83.06 a barrel.
November Brent crude
the global benchmark, declined by $2.13, or 2.3%, to $89.87 a barrel on ICE Futures Europe, with front-month contract prices poised to settled below $90 for the first time since Sept. 8, FactSet data show.
Back on Nymex, October gasoline
fell 1.2% to$2.4355 a gallon, while October heating oil
was down 0.5% at $3.294 a gallon.
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October natural gas
traded at $7.674 per million British thermal units, down 1%.
Analysts said oil traders, like participants in other markets, are paying close attention to the Fed, which is expected to deliver a rate increase of at least 75 basis points, or 0.75 percentage point, when it concludes its two-day meeting Wednesday. Fed-funds futures market have priced in an outside chance of a 100 basis point increase.
Aggressive tightening by the Fed and other major central banks has weighed on crude, stoking fears of a global economic slowdown or recession that could hit demand.
“We continue to believe that the oil market is in the process of finding its footing,” said analysts at Sevens Report Research, in a Tuesday newsletter.
“However, a hawkish Fed this week could further stoke fears of a hard landing and spur a continued rally in the dollar, which would surely see the recent lows near $80/barrel tested into the weekend,” they said.
And if “we see the dollar rally to new highs while the outlook for the global economy dims, expect pressure across the space as fears that global central banks will become overly restrictive with policy,” the Sevens Report analysts said. “Sending the global economy into recession will be negative for everything from industrially sensitive commodities from energy and industrial metals, to precious metals and grains.”
On the other hand, a “less-hawkish pivot could help spark another relief rally across commodities,” they said.
Meanwhile, falling refinery margins were seen as a drag on crude, said Warren Patterson, head of commodities strategy at ING, in a note. “Margins have come under pressure,” he said, noting reports that China could boost export quotas for refined products.
“The refined product market, particularly middle distillates, has faced significant tightness for much of the year, and so increased Chinese supply would be welcomed by many in the market,” he wrote.
In related news, The U.S. Department of Energy on Monday issued a notice of sale of up to 10 million barrels of crude oil from the nation’s Strategic petroleum Reserve in November. That was part of President Joe Biden’s March 31 announcement that authorized the sale of oil from the SPR to help address supply disruptions from the Russia-Ukraine war.