Oil Prices Slide to $76, Traders Fear Demand

Oil prices slid on Monday in international markets to $76 as fears of the negative impact of higher interest rates on demand overshadowed a preliminary agreement in the U.S. to raise the national debt limit.

In the London market, the price of a barrel was down 68 cents from the closing of trade at the end of last week, amounting to $76.27. In the U.S. market, barrels were traded at a price 56 cents lower, at $72.11.

Trading in the U.S. and Britain was weak at the beginning of the week due to the holiday.

Markets breathed a sigh of relief after U.S. President Joe Biden and House Speaker, Republican Kevin McCarthy, reached a preliminary agreement over the weekend to suspend the national debt limit and cap government spending for the next two years.

Their agreement still needs to receive the green light in Congress, and both are confident that it will be supported by both Republicans and Democrats.

Analysts, however, warn that the positive impact of the agreement on oil markets will quickly fade, as attention has already shifted to the June meeting of the U.S. central bank and interest rates.

Announced Pause in Rate Hikes

The Fed has announced a pause in the cycle of interest rate hikes, but it could still raise them in June, warns Tony Sycamore from IG, reminding that ‘higher interest rates in the U.S. negatively affect demand for oil.’

Markets speculate that the U.S. central bank could raise interest rates by a quarter percentage point in June and then maintain them at the new level until the end of the year.

Market sentiment has also been dampened by a decline in profits of Chinese industrial companies and conflicting signals from the Organization of the Petroleum Exporting Countries (OPEC) and their allies regarding production policy ahead of the regular meeting scheduled for June 4.

Thus, Saudi Energy Minister Abdulaziz bin Salman warned traders speculating on falling oil prices that they could be unpleasantly surprised, which was interpreted in the market as a signal that OPEC+ might again reduce production.

From Russia, however, a different message came through Deputy Prime Minister Alexander Novak, who estimated that OPEC+ would not change production since it had changed it just a month ago, reducing supply from May to the end of the year by 1.16 million barrels per day.

– Traders are a bit confused, we don’t know what to expect – said Craig Erlam from OANDA.

– Maybe Saudi Arabia wants to keep traders on edge, but if you say something like that and then do nothing, it could be concluded that you are weak, and prices could fall again – Erlam explains.

Due to the holiday in Austria, where OPEC is headquartered, it did not announce how much a barrel of its members’ oil basket was worth on Friday. On Thursday, its price was $76.94.