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All eyes are on the Fed as oil markets gauge the economy

The expected increase in lending rates when Federal Reserve policymakers respond will dominate the news cycle and likely cause oil prices to fall further, analysts said.

Weak economic data pushed West Texas Intermediate, the US benchmark for the price of oil, down nearly 2% last week to settle at $85.11 a barrel on Friday.

Giovanni Staunovo, commodities analyst at Swiss investment bank UBS, said the price of oil remains in a tussle between those bracing for the global recession and those expecting demand to remain. strong in a context of scarcity. On the upside, China is lifting some of its COVID-19 restrictions and its factory production and retail sales data are better than expected, pointing to greater demand for oil in the world’s second-largest economy behind. United States.

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By contrast, analysts and traders remain concerned that aggressive interest rate hikes to stifle inflation in the United States and Europe could drive the economy into recession and sap demand for oil.

The prospect of “aggressive monetary tightening” prompted the World Bank last week to warn that the global economy was in the grip of a sharp slowdown. The bank said these policies would certainly reduce inflation, but with central banks raising rates at the same time, this could have global implications, putting downward pressure on oil prices. creating even more headwinds for the price of oil.

The UK central bank is expected to raise its key rate by half a percentage point to stop inflation hovering around 10%.

US inflation, meanwhile, was 8.3% in August, down from 9.1% in June thanks to a sharp drop in retail gasoline prices. But price increases for other items — groceries, rent, health care and utilities — have offset some of the relief.

Ole Hanson, head of commodities strategy at Saxo Bank in Denmark, said the consensus was that the Federal Reserve would raise its key short-term policy rate by three-quarters of a percentage point. A full one percentage point increase is possible, Hanson said, but it would hurt the outlook for oil demand.

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Another rate hike by the Fed would strengthen the value of the dollar, but it means that crude oil priced in the dollar is more expensive for holders of other currencies, dampening demand and lowering the price of oil.

“If the Fed were to get big and commodities crack accordingly,” Hanson said, “wait for an emergency OPEC+ meeting.”

OPEC+ refers to the major members of the Organization of the Petroleum Exporting Countries and their allies, including Russia. Earlier this month, the group said it would cut production by 100,000 barrels a day in October, but left the door open for extraordinary action if market sentiment warranted further intervention.

“A short-term economic shock is certainly on the menu,” said Tamas Varga of London oil broker PVM, “but it’s the only responsible way to tackle inflation head-on and avoid further damage. serious”.