Oil prices remained largely steady Tuesday as concerns that further interest rate hikes by the US Federal Reserve and a slowing Chinese economy could dampen demand were offset by worries that a tropical storm off the US Gulf Coast could impact supply.
Brent crude for October settlement dipped 0.2% to $84.24 a barrel as of 11:11 am GST Tuesday, while West Texas Intermediate (WTI) crude for October contracts edged down 0.3% to $79.87 per barrel around the same time.
Investors are waiting for important US economic data due later this week, which will help determine the direction of interest rates for this year and the next.
Jerome Powell, the chair of the Federal Reserve, said Friday that the central bank has no intention of slowing down its efforts to curb inflation through its tightening campaign, signaling that the Fed is “prepared” to raise interest rates further “if appropriate.” The federal funds rate has now touched a 22-year high.
Markets are currently seeing an 80% chance that the Fed will not change interest rates next month, according to Refinitiv’s FedWatch tool. However, the probability of a rate hike in November is now estimated to be around 56%.
"It may be difficult for oil prices to maintain the strong bull trend (seen) in July at this stage. The US and European economies will face downward pressure in the fourth quarter until interest rates peak," CMC Markets analyst Leon Li told Reuters.
"So there might be a concern about demand, which puts pressure on oil prices. And China's economy still hasn't seen a significant improvement... Oil prices may remain volatile at this stage, and further increases in the future may require a rebound in Chinese data."
Meanwhile, Tropical Storm Idalia hit western Cuba Monday and was close to becoming a hurricane as it headed towards Florida. The storm is expected to cause power outages and potentially affect crude production on the eastern side of the US Gulf Coast.
Tony Sycamore, a market analyst at IG, told Reuters that China's manufacturing purchasing managers’ index (PMI), due later this week, is expected to show more disappointing economic news for the world’s second-largest economy, as it's likely to remain in contraction territory for the fifth consecutive month.
Brent crude prices are expected to be supported around $80 per barrel in the second half of 2023, as the oil market remains in a deficit for the rest of the year before returning to a small surplus next year, Morgan Stanley said in a note last week.
The international bank said that while the output cuts authorized by the Organization of Petroleum Exporting Countries (OPEC) will have a favorable impact on oil prices in the near future, the cartel's market share could decline in the long term due to the highest spare capacity in 20 years, which could put downward pressure on prices.
Saudi Arabia has announced that it will extend its voluntary output cuts by one million barrels per day into September, with the potential of maintaining this cut beyond September and even increasing it. Russia will also reduce oil exports by 300,000 bpd in September.
