June 3, 2023

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Oil drops more than 1.5% on demand concerns and dollar strength

Oil drops more than 1.5% on demand concerns and dollar strength

Crude oil storage tanks are seen in an aerial view of the Cushing Oil Center in Cushing, Oklahoma, US, April 21, 2020. Reuters/UAV Base

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  • Strong dollar pressures as Fed rate decision approaches
  • Supply concerns cap the decline
  • Easing COVID-19 restrictions in China can provide support

LONDON (Reuters) – Oil fell more than 1.5 percent on Monday, weighed by expectations of weak global demand and a stronger U.S. dollar ahead of potential big interest rate hikes, although supply concerns limited the decline.

Central banks around the world are sure to increase borrowing costs this week and there is some risk of a 1 percentage point rise by the US Federal Reserve.

“The next meeting of the Fed and a strong dollar are keeping a lid on prices,” said Tamas Varga of BVM oil brokerage.

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Brent crude for November delivery fell $1.49, or 1.6 percent, to $89.86 a barrel by 1002 GMT. US West Texas Intermediate (WTI) for the month of October fell $1.57, or 1.8%, to $83.54.

A British public holiday at Queen Elizabeth’s funeral is expected to limit activity on Monday. Read more

Oil has also come under pressure from hopes of easing the gas supply crisis in Europe. German buyers retained the ability to receive Russian gas via the closed Nord Stream 1 pipeline, but this was later modified and there was no gas flow. Read more

Crude has soared this year, with benchmark Brent crude nearing a record high of $147 in March after Russia’s invasion of Ukraine exacerbated supply concerns. Since then, concerns about weak economic growth and demand have driven prices down.

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The dollar remained near a two-decade high ahead of this week’s decisions by the Federal Reserve and other central banks. A strong dollar makes dollar-denominated commodities more expensive for holders of other currencies and tends to affect oil and other risky assets.

The market has also been pressured by weak demand expectations, such as last week’s prediction by the International Energy Agency that there will be zero demand growth in the fourth quarter. Read more

Despite these concerns about demand, supply concerns kept the decline in check.

“The market is still hanging on by European sanctions on Russian oil. With supply disruptions in early December, the market is unlikely to see any quick response from US producers,” ANZ analysts said.

Analysts said the easing of COVID-19 restrictions in China, which has dampened demand expectations in the world’s second-largest energy consumer, could provide some optimism. Read more

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Additional reporting by Florence Tan and Jeslyn Lear. Editing by David Goodman

Our criteria: Thomson Reuters Trust Principles.