Oil Prices Fall as Economic Outlook Outweighs Tight Supply

Higher interest rates and stronger dollar dampen oil demand

by Motoni Olodun

Oil prices dropped on Tuesday as fears of interest rates staying high for longer weighed on the global economic outlook, offsetting the impact of tight supply. Brent crude futures fell 0.12% to $93.17 a barrel and U.S. West Texas Intermediate crude futures slipped 0.01% to $89.67 a barrel.

The decline came after the U.S. Federal Reserve and the European Central Bank reiterated their commitment to fight inflation, signalling that monetary policy may remain tight longer than expected. Higher interest rates tend to dampen oil demand by slowing economic growth.

Meanwhile, the U.S. dollar hit a 10-month high on Tuesday, as higher bond yields attracted investors towards the greenback. A stronger dollar makes oil more expensive for holders of other currencies, reducing its appeal.

On the supply side, oil markets remain tight as Russia and Saudi Arabia have extended their production cuts to the end of the year, while OPEC+ members have been cautious in increasing output amid uncertainty over demand recovery.

However, some relief came from Moscow on Monday, as it eased its temporary ban on gasoline and diesel exports, which was imposed to stabilise the domestic market. Russia is one of the world’s largest oil exporters and a key player in the OPEC+ alliance.

Oil prices could also find some support from China’s Golden Week holiday, which starts from Sunday and usually boosts travel and fuel consumption in the world’s second-biggest oil consumer.

Analysts said oil prices have risen by around 30% since mid-year due to supply constraints, but the outlook remains uncertain amid macroeconomic headwinds and geopolitical risks.

Source: Reuters

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