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Oil Prices Continue to Fall Following Fed Rate Increase and Economic Concerns

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After the U.S. Federal Reserve increased interest rates and as investors worried about the economy, oil prices fell 4% on Wednesday, adding to the significant losses from the previous session.

Brent futures reached their lowest closing since December 2021 at $72.33 a barrel after settling $2.99, or 4%, down. The session low for Brent was $71.70 per barrel, the lowest level since March 20.

West Texas Intermediate (WTI) oil prices in the US dropped $3.06, or 4.3%, to $68.60. The session low for WTI was $67.95 per barrel, the lowest price since March 24.

Both benchmarks had their largest daily percentage falls since early January the day before, a 5% drop on each.

As traders worried that slower economic growth might affect energy demand, the Fed increased interest rates by a quarter of a percentage point on Wednesday afternoon. This pressured oil prices.

However, the Fed also hinted that it might postpone further increases, giving officials more time to assess the effects of recent bank failures, watch for an end to the political impasse over raising the U.S. debt ceiling, and keep an eye on inflation.

Concerns about the banking industry were once again in the news on Monday as First Republic, the third significant U.S. institution to collapse in two months, was seized by American authorities. JPMorgan Chase & Co. agreed to accept $173 billion of the bank's loans, $30 billion of its securities, and $92 billion of its deposits.

Oil prices could benefit greatly from the Fed entering a pause mode, according to Price Futures Group analyst Phil Flynn. The key issue is whether or not the banking industry will see more blowback.

At its policy meeting on Thursday, the European Central Bank is anticipated to do the same.

Government statistics revealed that U.S. gasoline stocks unexpectedly increased by 1.7 million barrels last week, further depressing oil prices. 1.2 million less barrels had been predicted by analysts surveyed by Reuters. [EIA/S]

According to Andrew Lipow, head of Lipow Oil Associates in Houston, “the most notable thing is that gasoline demand gave back all of the increases that we'd seen in previous weeks.”

Compared to expectations for a 1.1 million-barrel reduction, U.S. oil stockpiles decreased by 1.3 million barrels for the week.

The world's biggest energy user and top crude oil purchaser, China, saw an unexpected decline in industrial activity in April, according to figures released over the weekend.

By year's end, Morgan Stanley now expects Brent prices to be $75 per barrel.

The bank said in a report that despite Western sanctions, Russia's exports were brisk. “Downside risk to Russia's supply and upside risk to China's demand have largely played out and prospects for 2H tightness have weakened,” the bank said.


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