Oil drops over 2% on demand worries ahead of U.S. Fed comments

Crude oil prices fell by $2 per barrel on Wednesday as investors grew more worried that recent economic data will encourage more aggressive interest rate hikes by central banks, pressuring economic growth and fuel demand. Brent crude futures for April delivery were down $2.01, or 2.4%, to $81.04 a barrel, while the West Texas Intermediate crude futures dropped by $1.99, or 2.6%, to $74.37 a barrel. Minutes from the U.S. Federal Reserve’s latest policy meeting are due on Wednesday and are expected to hint at how much further interest rates may need to rise to slow inflation in an economy that has remained stronger than expected through several rounds of monetary tightening.

“While better U.S. economic data should mean better oil demand, the concern is that this forces the Fed to over-tighten monetary policy to bring inflation under control,” said UBS analyst Giovanni Staunovo. “This is also supporting the U.S. dollar, which is not of help for oil.” The U.S. Dollar Index gained for a second straight session, making dollar-denominated oil more expensive for holders of other currencies. Other U.S. economic reports, however, showed some troubling signs for the world’s biggest oil consumer. Sales of existing homes fell January to their lowest since October 2010.

According to a preliminary Reuters poll on Tuesday, analysts forecast a rise in U.S. crude inventories, feeding demand worries. The American Petroleum Institute, an industry group, releases its inventory report. The economic outlook across Europe continues to show resilience, UBS said in a note after business surveys released on Tuesday showing surprisingly strong growth. Lending some support to oil, Russia plans to reduce crude exports from western ports in March by some 25% from February, three sources in the Russian oil market said. Morgan Stanley raised its global oil demand growth estimate for this year by about 36%, citing growing momentum in China’s reopening and a recovery in aviation. Reuters