In addition, the US Federal Reserve’s policy of raising interest rates continues, which is clearly reflected in oil prices, alongside strong market concern about the specter of recession looming over the US economy, which directly affects the demand for oil, in addition to other factors, including the contraction of manufacturing activities in China.
U.S. Nymex crude is still down around 9% this week, following a four-day decline. Brent crude also fell, around 8% for the week. Despite relatively high prices, in today’s Asian trading on Friday, oil is heading for a third consecutive weekly decline. The price drop came despite signs of strength in the current oil market, indicating that selling in the market was much needed.
And the US Federal Reserve decided at its last meeting to raise the interest rate by 25 basis points, the tenth increase since last March.
Rising interest rates usually come with a wide-ranging set of repercussions, including on assets in the United States and globally at the same time, as well as on the energy sector and prices. oil, which the markets finally translated into practice in light of a set of simultaneous factors that spurred this trend.
US Federal Trends
Gerard Caprio, professor of economics at Williams College, said in exclusive statements to “Economy Sky News Arabia” that most observers of the US Federal Reserve believe it will temporarily stop raising interest rates.
He justifies this by saying that bankruptcies and mergers in the banking sector are likely to lead to lower lending and a slowing economy, in addition to the slowdown caused by high interest rates.
But even stopping at current levels leaves a number of banks with assets that generate lower rates of return, and so those banks will only be saved by a significant drop in interest rates, while the Federal Reserve continues to indicate that it intends to bring inflation back to its mature target of 2 percent.
This comes at a time when uncertainty continues to grip the banking sector in the United States of America, amid fears of an expanding “domino effect” on small and medium-sized banks, and after the series of stumbles that began last March, from Silicon Valley to First Republic Bank, which JP Morgan recently acquired, to Signature Bank, as the list grows to include other banks facing many similar risks, including Bac West Bank, which recently announced that it was considering strategic options, including the sale.
These factors interact to significantly affect oil prices, as prices return to their levels after the crisis has been brought under control, which was previously expressed by Russian Deputy Prime Minister Alexander Novak, who attributed the price decline world oil markets to the banking crisis. in the United States, expecting it to return to previous levels in the foreseeable future after containing this crisis, according to the Russian agency Sputnik.
Increase in costs and reduction in demand
In this context, Clay Siegel, Director of Global Oil Services at Rapidan Energy Group, said in exclusive statements to Iqtisad Sky News Arabia:
Rising interest rates have been a headwind for oil prices, raising costs for businesses and consumers, and reducing demand for oil accordingly. Any cut in the Fed rate would support crude oil prices on the other side. There is no strong historical relationship between the timing of interest rate cuts and oil price increases.
He explains that there are other fundamental factors affecting oil prices, supply and demand, and the sentiments of market participants, in addition to monetary policy and the pricing environment.
And he concludes his remarks by saying: “We can say that the Federal Reserve taking a more appropriate direction, that is to say lower interest rates after this, will be constructive with regard to the demand for oil and its prices later.
The Fed’s language in its recent statement made clear changes, saying it will ‘watch upcoming data’ to determine if further rate hikes are appropriate, instead of saying it ‘expects’ that there is a need for more rate hikes. , and what was seen as a clear signal, It will likely turn to stopping interest rate hikes.
Slow down overall economic activity
University of Massachusetts economics professor Robert Paulin said in exclusive statements to “Economy Sky News Arabia” that the US Federal Reserve aims to slow overall economic activity in the United States by raising the interest rate. interest in its policy, and this is the approach they rely on to curb inflation.
He adds: “As a result, it is also likely that the decline in global oil prices will continue, based on the decline in US and global demand for oil as well as the lower level of economic activity.”
A director of the Political Economy Research Institute at the University of Massachusetts points out:
There is a reasonable possibility that the US economy will collapse or enter a recession and that other high-income economies will contract along with the US. Thus, if this is the case, the demand for oil will fall sharply, which will lead to a sharp drop in world oil prices.
Despite a series of successive declines in oil prices in recent weeks, various reports have indicated expectations of a price increase above $100 a barrel before the end of the year, including estimates from the Bank of Swiss investment UBS:
In a recent report, the bank mentioned a number of fundamental factors supporting the current price decline, including the selling of futures contracts by financial institutions, the impact of current risks and the aspiration of these institutions to protect them, with respect to oil producers. However, the bank maintained its expectations for oil prices, expecting prices to hit $100 a barrel next June and break through the 100 barrier to reach $105 from September through the end of the month. ‘year. The bank’s estimates point to a number of factors supporting higher oil prices. Most important is the potential shortage of supply as the OPEC+ Plus decision comes into effect, and as demand for oil increases in the coming months.
Triple relationship (interest rate, gold and oil)
But on the other hand, Head of Geostrategic Analysis, Peter Hussey, explains in exclusive statements to “Sky News Arabia Economy” that “high interest rates make it more expensive to borrow money, and that stimulates price increases so businesses can increase their revenue to pay.” the costs of increased borrowing costs.
He adds: “There is a relationship between inflation rates and interest, the price of gold and the cost of oil. In the years 1975, 1980, 1981, 1990, 2000, 2001, and 2009, rapidly rising oil prices led directly to a recession in the United States.”
And he points out that with respect to the current situation, with an increase in interest rates and then a corresponding increase in prices, as mentioned, this increase in prices will of course affect oil (and justify the current declines).
However, Hussey estimates that a significant increase in oil production in the United States to 13 million barrels per day and then 15 million barrels per day would reduce oil prices to $45 per barrel, and that alone would result in a significant reduction prices, in particular oil prices Nutrients, as described.
The cost of investing and borrowing
For his part, energy expert Hashim Akl explains, in exclusive statements to the “Sky News Arabia Economy” site, that when the interest is increased, the cost of investing and borrowing becomes expensive, and it adds: “The decision of the US Federal Reserve to raise the interest rate leads to a drop in the price of oil and also of gold; the higher it is.” The US currency exchange rate has caused global oil prices to fall.
It should be noted that although the Fed decided at its last meeting to raise the interest rate by 25 basis points, which should have, in theory, translated into lower gold prices, changes in the language adopted in the Fed statement “supported investors’ trend toward gold.”
Going back to Akl’s statements, he points out that the decision to raise the US interest rate encourages investors as well as citizens to deposit their money in banks in order to obtain the high interest rate set by the bank.
Also, the rise in interest rates leads to a slowdown in borrowing operations, then the movement of sales decreases, which leads to a drop in inflation and control of the rise in commodity prices.
He believes that “if this period is prolonged, the specter of recession threatens the economy, and this means a decline in purchasing power, and therefore a decline in production and the rate of growth as a result”, explaining about oil that there is an excess supply of oil, and the OPEC Plus decision will put an end to this excess supply; Prices will rise again in the second half of this year, according to his estimate.
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