Interest rate hike by US Fed could have bearish impact on crude oil prices: Analysts

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An interest rate hike by the US Federal Reserve could have a bearish impact on crude oil prices, said analysts.

The US Fed is expected to announce another interest rate hike after the conclusion of its two-day meeting on July 26.

“Whenever the Fed hikes interest rate, the US dollar gains strength. This makes it difficult for consumers to buy crude. In the past, an increase in interest rate has had a negative impact on crude oil and prices have declined on account of that,” said Prashant Vasisht, VP and Co-head, Corporate Ratings, ICRA.

Crude oil prices have gained momentum in recent weeks on account of tighter supply in the market after production cuts by Saudi-led OPEC+, or Organisation of Petroleum Exporting Countries, and its allies.

On July 25, crude oil price touched $83 per barrel— the highest in the last three months. The gain in crude oil prices comes as Saudi Arabia implemented additional supply cuts of 1 million barrels per day (bpd) from July and because of the steps taken by Chinese government to boost its economy. Prices were trading around $75 per barrel in June.

OPEC+ had cut production by 1.6 million bpd in May till the end of 2023. In the May cuts, Saudi Arabia had reduced supply by 500,000 bpd, while Iraq had cut over 200,000 bpd until the end of the year. Russia, which is part of OPEC+, had announced an extension of its production cut of 50,000 bpd till the end of 2023.

Consumer demand typically takes a hit with an increase in interest rate, said an analyst on the condition of anonymity.

“Higher interest rates are negative for crude demand and therefore bearish for crude prices. One of the reasons why crude oil prices have remained low despite production cuts is attributable to interest rate hikes. People have been fearing that the economic growth rate in developed countries, particularly in the US, would take a hit, if the Fed decides to continue tightening. So, the current interest rate hike would probably add to the merit,” the analyst added.

However, crude oil prices are dependent on many factors, including oil supply in the market and economic growth of China—the largest consumer of crude oil, said energy experts.

“Hopes of economic growth in China and additional cuts from Saudi are bringing up prices of crude oil. Generally speaking, increase in interest rate by the US Fed results in decline in crude oil. How prices will finally behave depend on all these factors,” said Vasisht.

In June, the US Fed had paused interest rate hikes after 10 consecutive hikes in just over a year. However, the central bank had said that two more interest rate hikes would be announced later in the year.