The Federal Reserve raised interest rates by 0.25% on Wednesday, but oil prices march on. By Thursday morning, WTI crude oil was trading above $80 per barrel for the first time since mid-April.
This price resilience in the face of a major Fed rate hike shows that fundamentals are still bullish for oil. Tight supplies and robust demand continue to support higher prices, despite economic growth concerns.
Why Did Oil Prices Rise After the Rate Hike?
Analysts had predicted that oil prices would fall after a Fed rate hike, due to expectations of slowing economic growth and oil demand. However, this expected drop did not materialize for several reasons:
- The rate hike was already priced in. Markets expected the 0.25% increase, so there were no major surprises.
- Gasoline inventories remain low. Gas stockpiles are 7% under the 5-year average for this time of year. Tight supplies are supporting prices.
- Demand looks resilient. Strong second quarter U.S. GDP growth and optimistic demand forecasts for the second half of 2022 counter concerns about economic weakness.
- Supply is still constrained. OPEC+ is still gradually rolling back pandemic-era production cuts. U.S. shale growth is limited by capital discipline and supply chain issues.
Essentially, the bullish oil market fundamentals outweighed concerns about economic impacts of higher interest rates. The rate hike itself was not enough to dramatically shift the supply-demand balance.
How High Could Oil Prices Go?
With WTI back above $80, further upside looks likely in the near term. Some analysts see crude testing $90 or even $100 per barrel this summer. Here are some potential price drivers:
- EU ban on Russian seaborne oil. The ban starts in December and could remove 1-3 million barrels per day from the market.
- Low oil inventories. OECD crude and product stockpiles are below 5-year averages.
- Limited OPEC+ spare capacity. The producer group is struggling to hit raised output quotas, signaling limited available spare capacity.
- Refining bottlenecks. Capacity taken offline during COVID has been slow to restart, crimping product availability.
- Gas-to-oil switching. High natural gas prices in Europe are prompting power generators to switch to diesel and fuel oil where possible.
On the bearish side, a major economic slowdown could dent oil demand enough to halt the uptrend. For now though, prices look poised to test higher ground through the end of 2023.
The Takeaway for Investors
For oil investors, the Fed rate hike and $80 WTI reinforce the bullish market thesis. While economic risks are rising, supply-demand fundamentals show a market still rebalancing from COVID impacts.
With Brent and WTI both over $80, oil companies and oil-linked ETFs stand to deliver strong earnings and cash flow in coming quarters if prices hold near these levels. The rate-driven pullback many expected has yet to materialize.
Instead of trying to time short-term fluctuations around Fed actions, oil investors may want to focus on the bigger picture supply deficit still unfolding. By staying invested through temporary volatility, portfolio returns could benefit from what looks like a structurally bullish backdrop for oil prices
Sources:
Geiger, J. (2023, July 27). Oil Ignores Fed Hike As WTI Hits $80. OilPrice.com.https://oilprice.com/Latest-Energy-News/World-News/Oil-Ignores-Fed-Hike-As-WTI-Hits-80.html
Fox, J. (2023, July 26). Fed approves hike that takes interest rates to highest level in more than 22 years. CNBC. https://www.cnbc.com/2023/07/26/fed-meeting-july-2023-.html