Fears of Aggressive US Interest Rate Pushed Down Oil Prices

After three days of gains, oil prices fell on Monday on fears of a global economic slowdown due to aggressive US interest rate hikes that could dent fuel demand and of the possible return of Iranian crude on the market.

By 0054 GMT, Brent crude – the global benchmark for two-thirds of the world’s oil – futures for October settlement declined 1.2% or $1.17 to $95.55 a barrel, with concerns over slowing demand in China – the world’s second-largest economy – because of a power crunch in some areas also weighing on prices.

As its economy slowed unexpectedly in July, China also cut lending rates last week to revive demand with the chief market analyst at Avatrade, Naeem Aslam, explaining traders’ belief that slower economic growth will adversely influence the prices.

Traders are also watching closely the prospect of Iranian crude returning to the market after the leaders of the US, Britain, France, and Germany discussed on Sunday efforts to revive the 2015 Iran nuclear deal, which would Tehran to pump more oil into the market.

The gauge that tracks US crude, West Texas Intermediate’s futures for September delivery, due to expire on Monday, was down 1.26% at $89.63 a barrel.

After climbing for a third straight day on Friday, both Brent and WTI fell about 1.5% for the week on demand fears and a stronger dollar. Hiroyuki Kikukawa, general manager of research at Nissan Securities, explains that investors’ concerns are that a possible steep rate hike by the Fed would sap fuel demand and cause an economic slowdown.

It is expected that Federal Reserve chairman Jerome Powell possibly indicates the pace of future interest rate increases when he addresses the US central bank’s annual symposium in Jackson Hole, Wyoming, this week.

After Fed officials indicated that the central bank is expected to continue with its aggressive monetary tightening policy, the US dollar index hit a new five-week high on Monday.

As it attempts to arrest inflation which is running at a four-decade high, the Fed may raise interest rates by 75 basis points for a third consecutive time during its next meeting set for September 20 and September 21.

Aslam emphasized that investors believe that if the hawkish monetary policy of the Fed continues, it will impede US economic growth and negatively affect oil demand.

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