Oil prices sank more than $4 on Thursday as investors focused on the possibility of a significant U.S. rate rise later this month, which may reduce inflation while reducing oil demand.

Brent oil futures for September declined $4.05 to $95.52 a barrel by 1356 GMT, on course to end the session below $100 for the third time in a row.

The price of US West Texas Intermediate crude for August delivery was $91.63 per barrel, down $4.67.

Both futures touched lows on Thursday that were lower than the closing on February 23, the day before Russia invaded Ukraine, with Brent touching its lowest since February 21.

Oil prices have fallen in the last two weeks due to recession fears, despite a decline in Russian crude and processed product shipments due to Western sanctions and a supply interruption in Libya. 

“Clearly, the attention has shifted to the demand side of the oil equation. The weekly EIA (U.S. Energy Information Administration) data released yesterday revealed significant increases in product inventories “PVM Oil Associates analyst Tamas Varga said.

“Collateral damage of growing fears of inflation is the strong dollar, which is also bearish for oil prices. Interestingly, physical markets are still strong but the change in sentiment of financial investors is currently the dominant driving force.”

The Federal Reserve of the United States is expected to increase interest rates by 100 basis points this month in response to a dismal inflation report that showed price pressures rising. The Federal Reserve’s policy meeting is scheduled for July 26-27. 

The Fed rate increase is likely to follow the Bank of Canada’s unexpected action on Wednesday.

Investors also rushed to the dollar, which is often seen as a safe haven asset. On Wednesday, the dollar index reached a 20-year high, making oil purchases more costly for non-US purchasers.

In Europe, the European Commission lowered its economic growth projection and raised the predicted inflation rate to 7.6 percent, both of which were negative for demand. 

Concerns over COVID-19 restrictions in many Chinese cities to prevent new instances of a highly contagious subvariant have also kept oil prices under control.

China’s daily crude oil imports fell to their lowest level since July 2018, according to customs data released on Wednesday, as refiners braced for tightening measures to reduce demand.

Data from the US Energy Information Administration show that demand is also slowing, with product supply falling to 18.7 million barrels per day, the lowest since June 2021. Crude inventories increased as a result of another large release from strategic reserves. 

US Vice President Joe Biden will go to Saudi Arabia on Friday to attend a gathering of Gulf allies and urge on them to produce more oil.

However, spare capacity at the Organization of Petroleum Exporting Countries is running short, with most producers pumping at full capacity, and it is unknown how much additional Saudi Arabia can swiftly put into the market. 

Source: Reuters

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