Oil prices moved lower on Wednesday even as Middle East supply risks remained high. Brent crude futures fell 1.1% to $107.55 a barrel. West Texas Intermediate (WTI) crude fell 1.6% to $104.11 a barrel. Despite Wednesday’s fall, both oil benchmarks remained close to four-month highs.
On Tuesday, Brent and WTI had settled at their highest levels since May 19, showing that oil prices are still elevated despite the latest pullback.
Fed rate decision puts pressure on oil
The biggest reason for the fall is the Federal Reserve’s interest-rate decision. The US Federal Reserve is set to announce its interest-rate decision later Wednesday after a two-day policy meeting. The Fed is widely expected to raise its benchmark interest rate for the first time since 2023.
Deep Dive
What factors are causing oil prices to fall despite ongoing supply risks in the Middle East?
How does a stronger US dollar affect global oil prices?
What impact does the Federal Reserve's interest rate decision have on oil demand?
Higher interest rates can slow economic activity because borrowing becomes more expensive for consumers and businesses. A weaker economy can reduce fuel consumption and, in turn, lower demand for crude oil. This is putting pressure on oil prices even though there are still serious supply risks in the Middle East, according to The Wall Street Journal.
Strong dollar weighs on oil prices
Oil is traded globally in US dollars. When the dollar becomes stronger, crude oil becomes more expensive for buyers using other currencies. This can reduce demand and put downward pressure on oil prices.
{{/usCountry}}Oil is traded globally in US dollars. When the dollar becomes stronger, crude oil becomes more expensive for buyers using other currencies. This can reduce demand and put downward pressure on oil prices.
{{/usCountry}}Oil prices also came under pressure from elevated US Treasury yields, adding to the market’s focus on tighter financial conditions. The combination of a stronger dollar and high Treasury yields is therefore limiting oil’s gains.
Also read: Fed rate hike: Will your savings earn more while your debt costs more?
US oil inventories rise by 7.1 million barrels
Data from the American Petroleum Institute (API) showed that US crude inventories increased by 7.1 million barrels last week.
A rise in inventories means there was more crude available in the US than previously expected. This helped reduce some immediate concerns about tight oil supplies. MUFG’s Soojin Kim said the inventory increase helped ease some of the near-term supply concerns, according to The Wall Street Journal.
Ongoing disruptions in the region and advances by Iran-backed Houthi militants continue to threaten crude supply and shipping routes. The risks are especially important because the Middle East is a major source of global oil exports. Any major disruption to exports could quickly tighten global crude supplies and push prices higher.
Saudi pipeline faces weeks of repairs
Drone attacks forced Saudi Arabia to shut down parts of the pipeline. Saudi Arabia is now trying to resume partial operations within days. However, damaged pumping stations could take six to eight weeks to fully repair, according to The Wall Street Journal.
The 750-mile East-West Pipeline can transport as much as 7 million barrels of oil a day to the Red Sea port of Yanbu. This pipeline is important because it gives Saudi Arabia another export route when shipments through the Strait of Hormuz face problems.
Middle East shipping risks stay high
Saudi Arabian Oil Co., better known as Aramco, is reportedly delaying some shipments to European customers after the pipeline attacks. European refiners are therefore having to look for replacement cargoes. UOB Global Economics & Markets Research highlighted the shipment delays in a research note, according to The Wall Street Journal.
The Strait of Hormuz is one of the world's most important oil shipping routes. The International Maritime Organization had recorded 80 confirmed maritime incidents in the Strait of Hormuz and the wider Middle East since the conflict began. The figure was recorded as of September 15.
Also read: Why is Bitcoin falling today as Fed rate hike fears and CLARITY Act vote weigh on crypto?
Europe turns to Norway for replacement oil
European refiners are looking for alternatives because some Middle Eastern crude shipments have been delayed. One major replacement source is Norway’s Johan Sverdrup crude. Johan Sverdrup is a medium-sour crude that is similar in quality to some Middle Eastern oil grades, according to The Wall Street Journal.
Johan Sverdrup crude jumped $7.265 a barrel on Tuesday. It reached a record premium of $19.55 a barrel over Dated Brent, according to S&P Global Commodity Insights.
Oil falls despite tight crude supplies
Johan Sverdrup is relatively close to European refineries compared with crude shipped from the Middle East. Refiners are increasingly using it as a replacement for Middle Eastern barrels. Shipping risks around the Strait of Hormuz, stronger Asian demand and delays in Middle East cargoes are all tightening supplies of sour crude in Europe, according to S&P Global Commodity Insights.
The decline is mainly coming from financial and demand concerns, rather than the Middle East risks disappearing. The expected Fed rate hike could slow economic activity and oil demand. A stronger US dollar makes dollar-priced crude more expensive for international buyers, while higher Treasury yields are also putting pressure on markets.
The 7.1-million-barrel rise in US crude inventories has also eased some immediate supply worries. At the same time, Middle East attacks, shipping disruptions and delayed Saudi cargoes are keeping the longer-term supply outlook tight.