Oil Price Fundamental Daily Forecast – Longs Exiting Amid Higher Fed Rate Hike Expectations

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading sharply lower on Friday, putting the markets in a position to post a weekly loss. Sellers are being motivated by concerns over more U.S. Federal Reserve interest rate hikes that could weigh on demand by causing a contraction in the economy, and signs of ample supply.

At 15:26 GMT, April WTI crude oil is trading $76.08, down $2.66 or -3.38% and April Brent crude oil is at $82.57, down $2.57 or -3.02%. The United States Oil Fund ETF (USO) is at $66.60, down $1.85 or -2.69%.

Hawkish Fed Officials Spooking Buyers

Two widely followed Fed officials on Thursday motivated traders to trim their long positions after warning that additional hikes in borrowing costs are essential to lower inflation to desired levels, Reuters reported.

Cleveland Fed President Loretta Mester, who does not have a vote on the policy-setting Federal Open Market Committee (FOMC) this year, said she thought even before the release of the jobs and CPI data that her colleagues were not being aggressive enough with their most recent rate hike. “I saw a compelling economic case for a 50-basis-point increase,” she said.

In a separate conversation with reporters, St. Louis Fed President James Bullard, who also does not hold a vote on the FOMC this year, agreed there was a good case for the Fed to have been more aggressive with its recent rate decision. “I was an advocate for a 50-basis-point hike and I argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could,” Reuters reported.

Strong Greenback Weighing on Demand

The dollar hit a six-week high against a basket of currencies on Friday as traders ramp up bets that the Federal Reserve will hike rates higher than previously anticipated, and hold them there for longer, as it battles still-high inflation while the employment picture also remains strong.

The greenback was also supported by major banks raising their rate hike forecasts. Goldman Sachs said it was expecting the Fed to hike rates three more times this year, by a quarter of a percentage point each time, after data this week pointed to persistent inflation and resilience in the labor market.

A stronger greenback tends to reduce foreign demand for dollar-denominated commodities like crude oil.

Short-Term Outlook

The crude oil market is in reset mode with traders having to price in additional Fed rate hikes. Furthermore, other major central banks are also having trouble containing inflation which means worldwide monetary policy is likely to become more restrictive. This is likely to push the global economy into a contraction, or even worse, a recession. This would likely lead to a drop in demand, which would continue to weigh on prices.