Oil prices fell on Monday ahead of a U.S. Federal Reserve meeting as investors tried to gauge the central bank’s appetite for further rate hikes. The Fed is widely expected to keep rates on hold for now, but recent tightening in financial markets could raise the risks of a hike further down the road.
Investors will also be watching the Fed’s economic and inflation projections for 2025, which will reveal any shift in the central bank’s view of its path to 2% inflation. Those projections shouldn’t be taken as gospel but indicate where officials’ most considerable bias may lie.
The slowdown in China has spooked the market, which is a major oil importer. Ongoing financial market turmoil and the potential for a global recession are adding to concerns about a sharp decline in demand growth.
Oil prices dropped after a survey showed China’s manufacturing activity fell at its fastest pace in nearly two years. That outweighed an otherwise upbeat U.S. jobs report, which helped the dollar rise against other currencies.
Worries about Russian crude supply weighed on the market, too. The country has redirected oil exports to Asia from Europe, where it previously shipped most of its crude. That has allowed trading houses to buy Russian oil at steep discounts from Baltic and Black Sea ports and store it in European commercial storage, which can be resold later. That’s not illegal under current sanctions, but it can limit the amount of crude that goes to refiners in Europe and China, dampening the demand outlook.
But the most significant driver for crude was a lack of confidence that any global central banks would step in to prop up the oil market in the short term. The recent selloff in financial markets and uncertainty over the global economy have shaken faith in the ability of policymakers to prevent a recession or manage the effects of one.
The Fed is expected to leave its key interest rate at 5%, where it has been for the past two years. But it will be a close call, with some Fed policy-setting committee members suggesting that a “skip” rather than a pause is on the cards.
The U.S. economy is increasing, but inflation remains below the Fed’s target. That means the Fed is unlikely to push for a quick rise in interest rates in 2023. But the bank’s leadership has signaled that it will be cautious and data-driven in deciding how to proceed. It’s still too early to say whether the Fed will take a break, but its decision will likely shape investor sentiment for the rest of the year. That is likely to keep the oil pressure. It’s near a critical support level in the low $70s area. A move below that could see it fall further, but a break above would mark an initial sign that the commodity was bottoming.