Oil prices edged lower Tuesday, trading in a choppy fashion as traders digested the latest interest rate cut in China as well as the deteriorating global economic outlook.
By 09:20 ET (13:20 GMT), U.S. crude futures traded 1% lower than Friday’s close at $71.22 a barrel after the U.S. was closed on Monday, while the Brent contract fell 0.2% to $75.94 a barrel.
China cuts interest rates again
Concerns over the strength of the Chinese economic recovery from the COVID hit have weighed heavily on oil prices this week, prompting a number of major investment banks to downgrade their estimates.
The People’s Bank of China cut its benchmark loan prime rate earlier Tuesday in an attempt to boost its struggling economy, but this has done little to boost sentiment as it was largely anticipated by markets, given that the country had trimmed short and medium-term lending rates last week.
Fears of a hawkish Powell
Away from China, traders are cautiously awaiting Fed Chair Jerome Powell’s two-day congressional testimony, starting on Wednesday, amid concerns that the head of the U.S. central bank will signal a July rate hike after it agreed to pause its year-long hiking cycle last week.
Higher interest rates can reduce economic activity, and fears are growing that the U.S. economy, the largest in the world, could enter a recession in the second half of the year.
The Eurozone economy did contract in the first quarter, and yet the European Central Bank is expected to continue to hike interest rates next month, after doing so again last week, as it attempts to conquer elevated inflation.
“While some believe the market will be in deficit later in the year, aided by the Saudi-driven OPEC+ cuts, which could support prices closer to what we saw late last year and early this, the economy remains one significant downside risk to this amid an adjustment in the markets toward higher rates for longer,” said Craig Erlam, an analyst at MarketPulse.
Iran’s crude supply grows
Turning to the supply side of the equation, Iran’s crude exports and oil output have hit new highs in 2023 despite U.S. sanctions, while Russian crude oil flows to international markets have drifted lower, according to data collated by Bloomberg, but remain well above levels seen in February, the baseline month for the country’s pledged output cuts.
