Oil prices drop amid concerns about further interest rate increases

Oil prices fell in afternoon trading on Tuesday as concerns about further interest rate increases and a stronger dollar offset optimism over an improving global economic outlook.

Brent, the benchmark for two thirds of the world’s oil, was 1.37 percent lower at $83.74 a barrel at 2.22pm UAE time while West Texas Intermediate, the gauge that tracks US crude, was down 1.54 per cent at $76.70 a barrel. Brent settled about 2 percent lower at $84.90 on Monday while WTI fell 2.23 percent to close at $77.90. “The latest news on the macro front is not bad, at all. The Chinese reopening is now well reflected through the first set of economic data,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“And the cherry on top, the IMF [International Monetary Fund] raised its growth forecast for this year … this is the kind of news that the energy markets normally cheer, but not this time, apparently.”

The IMF marginally raised its growth forecast to 2.9 percent for 2023 and said easing inflation and China’s reopening pointed to resilience in the global economy.

China's output is projected to accelerate to 5.2 percent, compared with a previous 4.4 percent forecast, while India is expected to outpace the world's economies with a 6.1 percent expansion in 2023, after growing 6.8 per cent last year.

India and China — two of the world’s largest crude oil importers — will account for half of global growth this year, compared with only a tenth for the US and euro area combined, the IMF said.

The fund expects oil prices to fall by about 16 percent this year. The average assumed price of oil based on futures markets as of November 29, 2022, is $81.13 in 2023 and $75.36 in 2024, the fund said.

Energy traders will be closely following Wednesday’s Opec+ meeting, where delegates are widely expected to recommend continuing the group’s existing oil output policy.

The US Federal Reserve, which will start its first policy meeting of this year later on Tuesday, is expected to announce a smaller interest rate increase amid cooling inflation rates in the world's largest economy.

“The US dollar is gaining some positive momentum into the Fed meeting, as investors know that the Fed won’t declare victory over inflation despite the falling inflation, and position accordingly,” said Ms Ozkardeskaya.

The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, was up 0.20 percent at 102.48. A stronger dollar makes oil more expensive for holders of other currencies.

At its last meeting in December, the Fed raised interest rates — for the seventh time in 2022 — by 50 basis points.

The US central bank will most likely announce a smaller increase of 25 basis points this week, but there is “little chance” it will declare the end of monetary tightening, said Ms Ozkardeskaya.