Oil prices retreated on Friday following remarks made by a senior U.S. Federal Reserve official suggesting the central bank should hold off on making any immediate cuts to interest rates. Both international benchmark Brent crude and U.S. benchmark West Texas Intermediate (WTI) crude declined in early Asian trading after posting gains the previous session.
The pullback came after Christopher Waller, a governor on the Fed’s influential board, argued interest rate cuts should be put on pause for at least two more months to evaluate whether the recent uptick in inflation is transitory or signals more persistent price pressures. Waller contended the Fed can afford to be patient and allow more time to assess the inflation situation before taking action given the still generally favorable economic conditions.
His comments pushed back against market expectations that the Fed may need to move more swiftly to lower rates and stoke growth as global economic headwinds persist. The prospect of higher interest rates for longer tends to weigh on oil, as reduced economic activity typically crimps energy demand growth.
Both Brent and WTI had settled higher on Thursday, paring some of those gains after Waller’s hawkish remarks were reported. His intervention came just a day after the Fed released minutes from its January policy meeting showing widespread concerns among officials about moving too fast on rate cuts.
Oil prices had been supported heading into the end of the week by escalating tensions in the Middle East. Attacks by Iran-backed Houthi rebels near Yemen have intensified to demonstrate solidarity with Palestinians amid the conflict in Gaza. This has raised supply risks in the Red Sea, a strategically important transit corridor for global oil shipments.
Meanwhile, Israeli Prime Minister Benjamin Netanyahu’s security cabinet reportedly approved sending negotiators to Paris for truce talks with Palestinian militant groups in Gaza. This added to hopes of de-escalation in the region that could alleviate upside pressures on oil.
Brent crude futures were last seen trading down around 0.3% on the day at $83.42 per barrel. Prices have held above $80 in recent weeks, with the international benchmark averaging around $88 since Russia’s invasion of Ukraine in late February.
West Texas Intermediate futures likewise slipped 0.3% to $78.36 per barrel. WTI has traded above $75 over the last month, averaging approximately $83 over the same period.
The pullback on Friday comes despite fundamental supply tightness as Western sanctions curb Russian exports. Output from OPEC+ has also substantially lagged targeted hikes, with many producers struggling to raise production.
IEA Calls on OPEC+ To Boost Output As Global Markets Remain Tight
In its latest monthly oil market report, the International Energy Agency (IEA) said commercial oil stockpiles in developed nations fell to their lowest levels since 2014 in March. It called for OPEC+ to help ease the supply crunch by expediting planned production increases.
The intergovernmental agency noted that markets could face further turbulence if Russian flows are curtailed more substantially. The EU is currently negotiating a phased embargo on Russian oil as part of a new sanctions package.
While the IEA anticipates supply growth will outpace demand growth in the second half of 2022, markets are likely to stay tight amid still robust consumption, low inventories and sparse spare capacity. As such, it expects prices will “remain vulnerable to supply disruptions and geopolitical tensions.”
Investors Eyeing Fed Moves Closely For Rate Path Implications
Oil markets are closely tracking signals from the Fed about the future trajectory of interest rates along with other central banks as borrowing costs have widespread economic ramifications. More hawkish messaging could place downward pressure on prices.
After Waller’s remarks, investors are looking ahead to comments from other Fed officials like Chair Jerome Powell for further clues on how quickly policymakers will move to tighten financial conditions. The central bank has been raising rates aggressively to rein in surging inflation.
Still, most economists expect the Fed will need to reverse course later in 2023 as economic activity slows substantially. Interest rate futures imply cuts could start as soon as September, though Waller pushed back on that timeline.
Geopolitics, Demand Trends Pose Ongoing Uncertainty for Oil Markets
Looking ahead, energy analysts anticipate oil prices will remain volatile as bullish and bearish forces battle for dominance. Upside supply risks like those in the Middle East need to be weighed against downside economic risks like higher borrowing costs and China’s COVID-19 restrictions.
If a ceasefire takes hold in Gaza or OPEC+ manages to bolster output materially, prices could decline further. But major disruptions to Russian flows would likely propel renewed upside. Gasoline demand trends as the U.S. heads into peak summer driving season are another critical factor to monitor.
More Fed speakers and upcoming economic data releases will help shape expectations around monetary policy and global growth trajectories. But unpredictable geopolitical flashpoints and COVID developments in China present major wild cards for oil price forecasting.
For now, Waller’s pushback against swift Fed stimulus has tilted sentiment bearish. But sustained declines below $80 Brent and $75 WTI face barriers given the bullish supply side fundamentals. With so much uncertainty, analysts expect volatility will persist as oil trades in a wide range bound by conflicting price pressures.
