Oil is down 2% as a rate hike looms and Russian inflows remain strong

  • The US Federal Reserve, European Central Bank and Bank of England all expect to raise interest rates this week
  • The meeting of the OPEC + committee is unlikely to change the policy
  • Oil initially rose after a drone attack in Iran

HOUSTON (Reuters) – Oil prices fell 2 percent on Monday, extending losses as looming interest rate increases by major central banks hit demand and Russian exports continued to be strong.

Investors expect the US Federal Reserve to raise interest rates by 25 basis points on Wednesday, followed the next day by half-point increases by the Bank of England and the European Central Bank. Any deviation from this text would come as a shock.

“We’ve been seeing a softening of risk sentiment over the past two weeks on ideas that higher interest rates could slow demand faster,” said Dennis Kessler, senior vice president of trading at BOK Financial.

Brent crude futures for March delivery fell $1.76, or 2.03 percent, to $84.90 a barrel. US crude fell $1.78 to $77.90 a barrel, down 2.23% – its biggest drop in nearly four weeks.

The market was also pressured by indications of Russian supply strength despite the EU embargo and the G7 ceiling imposed by the G7 industrialized countries over its invasion of Ukraine. Last week, both oil benchmarks recorded their first weekly loss in three.

Besides central bank meetings, the focus will also be on Wednesday’s meeting of key ministers from the OPEC+ group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia.

Three OPEC+ delegates told Reuters on Monday that the OPEC+ committee meeting will likely not change production policy.

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“The boat isn’t really in stormy seas right now. Why rock something that isn’t moving as it is,” said Ole Hansen, Head of Commodities Strategy at Saxo Bank.

Oil brokerage PVM said OPEC+ could “surprise the markets with a small cut,” adding that it was unlikely to adjust policy.

Earlier on Monday, oil prices rose due to tensions in the Middle East after a drone attack in Iran and hopes of a boost in Chinese demand.

Stefano Grasso, a senior portfolio manager at 8VantEdge in Singapore, said that while it was not yet clear what was happening in Iran, any escalation there would likely disrupt the flow of crude.

Hopes of an increase in Chinese demand boosted oil in 2023. The world’s largest importer of crude oil pledged over the weekend to promote a recovery in consumption that would support demand.

“Markets have priced in the increased demand mostly from China, so traders are waiting and seeing attitudes for clear signs of demand pulling,” Kessler added.

Traders also remained cautious about damage to oil production and transportation in Texas after the state’s oil regulator advised pipeline operators to secure equipment and facilities after severe weather forecasts over the next few days.

A preliminary Reuters poll showed that US crude oil inventories are expected to decline by about one million barrels in the week ending January 27, while gasoline stocks were expected to rise.

Additional reporting by Alex Lawler. Additional reporting by Swati Verma, Florence Tan and Emily Chow. Editing by Emilia Sithole Matares, Bernadette Boehm, Philippa Fletcher

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