Oil prices fall 1% ahead of expected U.S. interest rate hike

© Reuters. Models of oil barrels and a pump jack are displayed in front of a rising stock graph and "$100" in this illustration taken February 24, 2022. REUTERS/Dado Ruvic/Illustration


By Arathy Somasekhar

HOUSTON (Reuters) - Oil prices edged down 1% on Wednesday on the back concerns over fuel demand and global economic growth ahead of an expected big hike in interest rates by the Federal Reserve as U.S. oil production reached pre-pandemic levels.

Brent crude futures for August were down $1.04 , or 0.9%, at $120.13 a barrel by 11:00 a.m. ET (1500 GMT), having fallen as low as $119.26 earlier in the session.

U.S. West Texas Intermediate crude for July fell $1.56, or 1.3%, to $117.46 a barrel, after dropping to a low of $116.60.

U.S. crude production rose to 12 million barrels per day last week, its highest level since April 2020, data from the Energy Information Administration showed. [EIA/S]

The data also showed a build in U.S. crude stocks and distillate inventories, while gasoline posted a surprise drawdown on the back of the summer driving season.

Surging inflation has led investors and oil traders to brace for a big move by the Fed this week: a 75 basis points increase, which would be the largest U.S. interest rate hike in 28 years.

Stronger monetary policy tightening could "pave the way for recession-induced demand destruction," PVM analyst Stephen Brennock said.

The European Central Bank promised fresh support and a new tool on Wednesday to temper a market rout that has fanned fears of a new debt crisis on the euro area's southern rim but appears to have disappointed investors looking for bolder steps.

Adding to demand woes, China's latest COVID outbreak has raised fears of a new phase of lockdowns.

Higher oil prices and weakening economic forecasts are dimming futures demand prospects, the International Energy Agency said.

But persistent concerns about tight supply meant oil prices were still holding near $120 a barrel.

The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, are struggling to reach their monthly crude production quotas, recently hit by a political crisis that has reduced Libya's output.

"Because OPEC production is still falling noticeably short of the announced level, this would result in a supply deficit of around 1.5 million barrels per day on the oil market in the second half of the year," said Carsten Fritsch, commodity analyst at Commerzbank (ETR:CBKG) in Frankfurt.

Oil prices gained some support from tight gasoline supply. U.S. President Joe Biden told oil companies to explain why they were not putting more gasoline into the market.