Oil drops from 7-year high after Fed signals rate hike

Oil fell from a seven-year high yesterday after the US Federal Reserve signalled that it would soon start raising interest rates to quell inflation, denting investors' appetite for risk assets, including commodities.

West Texas Intermediate declined after rallying to the highest level since October 2014 on Wednesday, when global benchmark Brent topped US$90. That surge came as inventories at the key US storage hub in Cushing fell again last week to hit the lowest level for this time of year in a decade.

Crude traders are also tracking events in Ukraine on concern that Russia may launch an invasion after massing thousands of troops on the border, potentially disrupting energy supplies. Amid the high-stakes stand-off, the US has handed Russia its written response to Moscow's security demands.

Oil has rallied in the opening weeks of this year on the continued recovery in energy consumption from the ravages of the Covid-19 pandemic. The sustained surge has stoked inflationary pressures worldwide, and the Fed signalled that it will start boosting borrowing costs from March. Its action helped to strengthen the US dollar, weighing on raw materials.

"What we are seeing today is probably just a technical move, some profit-taking after the recent gains," said Mr Howie Lee, an economist at OCBC Bank in Singapore. "The momentum still looks strong," said Mr Lee, adding that Opec+ has faced difficulties in meeting scheduled output increases.

"Supply challenges are the drivers behind this surge in oil prices, and the tightness in the market will persist in the near term, maybe this quarter. I see little reason why oil won't go to US$100."

Among the other US inventory figures, nationwide crude supplies expanded for a second week and petrol inventories rose to the highest level in nearly a year. Still, petrol stockpiles remain seasonally low as US Gulf Coast refiners are undergoing a heavier-than-usual maintenance season, and demand is expected to bounce back during the summer driving season.

Opec and its allies including Russia will get a chance to weigh in when they meet on Feb 2. The coalition will probably rubber-stamp a hike of 400,000 barrels a day for March, according to officials from about half of the group's members.

BLOOMBERG