Oil dips on demand worries as more rate hikes likely

(Representative image)

Oil prices fell on Friday, headed for a weekly decline as traders worried interest rate hikes could sap demand despite signs of tighter supplies including lower U.S. crude stocks.

In a second straight day of losses, Brent crude slipped 53 cents, or 0.7%, to $73.61 a barrel by 11:27 a.m. ET (1527 GMT). U.S. West Texas Intermediate (WTI) crude was down 63 cents, or 1%, at $68.86.

On Thursday, Brent dropped about $3 a barrel after the Bank of England raised interest rates by a bigger-than-expected half a percentage point. Central banks in Norway and Switzerland also hiked rates.

More U.S. interest rate hikes also seemed likelier. San Francisco Federal Reserve Bank President Mary Daly said two more rate hikes this year was a ”very reasonable” projection.

”There seems to be a growing ’risk back off’ type of trade now in crude, triggered by the interest rate rises in the EU and disappointing stimulus numbers out of China,” said Dennis Kissler, senior vice president of trading at BOK Financial.

The Bank of England rate rise triggered fund liquidation and energy producers were moving to a ”hedge now” mentality, Kissler added.

Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and reduce oil demand.

Risk-aversion among investors also boosted the value of the U.S. dollar, which pressures oil prices by making the commodity more expensive for other currency holders.

U.S. business activity also fell to a three-month low in June as services growth eased for the first time this year and the contraction in the manufacturing sector deepened, survey data showed.

Wall Street’s main indexes fell, while gold prices were on track for their biggest weekly decline since early February.

China’s promising economic recovery has faltered with several months in a row of softer-than-expected consumption, production and property market data.

The recession and demand concerns outweighed signs of supply-side tightness. This week’s U.S. inventory report showed crude stocks posted a surprise decline of 3.8 million barrels.

Also set to tighten the market is Saudi Arabia’s production cut of 1 million barrels per day in July announced along with an OPEC+ deal to limit supplies into 2024.