Oil Price Forecast: Lower as Fed, ECB Rate Hikes, Concerns Over US Economy Weigh

WTI Oil Highlights

• WTI oil prices fell 5% on Tuesday
• US benchmark at the lowest point since March
• Federal Reserve and ECB expected to raise interest rates

WTI Oil Overview

WTI oil prices continued to drop on Wednesday after falling by 5% the day before. This was due to concerns among investors about the state of the US economy, with a Federal Reserve interest rate increase expected later in the day. The US benchmark reached its lowest point since late March during the previous session, with the largest one-day percentage decrease seen since early January.

At 10:55 GMT, WTI Oil is at $69.37, down $2.24 or -3.13%. On Tuesday, the United States Oil Fund ETF (USO) settled at $63.06, down $3.49 or -5.24%.

Central Banks Expected to Hike Rates

On Wednesday, the Federal Reserve is anticipated to increase interest rates by 25 basis points in an attempt to control inflation. Similarly, the European Central Bank is expected to raise rates at its usual policy meeting on Thursday. This may hinder economic growth and affect energy demand. On top of that, worries about the state of the US banking industry and pessimistic jobs data from Tuesday have not eased concerns that the US economy is heading towards a minor recession.

Banking Turmoil Impacts Oil Prices

Oil prices have been affected by various factors this week. Firstly, First Republic Bank was seized by regulators and most of its assets were sold to JPMorgan Chase & Co on Monday to settle the biggest US bank failure since the 2008 financial crisis, which has caused ongoing banking turmoil.

Global Factors Weigh on Oil

In addition, the central bank of Australia surprised the markets by raising its cash rate on Tuesday and indicating that further tightening might be necessary to tackle high inflation.

Diesel demand has also been a concern in recent months, leading to a decline in U.S. heating oil futures to the lowest point since December 2021.

Furthermore, manufacturing activity in China unexpectedly fell in April according to data from over the weekend, which is putting pressure on energy prices. China is the largest energy consumer globally and the leading purchaser of crude oil.

API Crude Stockpiles Continue Drop

Meanwhile, traders have showed little reaction to another drop in crude oil stockpiles. For the first time since December, U.S. crude stockpiles have dropped for three consecutive weeks, decreasing by approximately 3.9 million barrels last week, according to sources in the market citing data from the American Petroleum Institute (API) on Tuesday.

Official stockpile data from the U.S. Energy Information Administration is scheduled for release on Wednesday at 10:30 a.m. EDT.

OPEC Oil Output Declines Further

As per a Reuters survey, OPEC oil output declined by 190,000 barrels per day in April, with Iraq and Nigeria being the major contributors to the decrease. Output is anticipated to decrease even further in May due to the implementation of a new round of voluntary cuts announced on April 2.

Technical Analysis

From a technical standpoint, WTI Oil is currently trading below its daily pivot at $78.02 and support (S1) at $72.57. Both levels are new resistance.

Buyers would have to overcome S1 and then the pivot in order to reestablish upside momentum. Otherwise, our assumption is prices will continue to slide into support (S2) at $68.49.

Given the bearish pall over the market at this time, the safe play appears to be a value play. Conversely, chasing momentum is the more risky play.

For a look at all of today’s economic events, check out our economic calendar.