Crude oil weakens; Fed hike concerns outweigh Chinese optimism

© Reuters

By Peter Nurse   ECB Interest Rate Decision

Investing.com -- Oil prices retreated Friday on fears that inflation remaining at elevated levels will result in the Federal Reserve keeping monetary policy tight for longer than expected, but are still set to the end the week largely flat on optimism that an economic recovery in China will result in a surge in crude demand from the second largest economy.  

By 09:20 ET (14:20 GMT), U.S. crude futures traded 2.1% lower at $76.51 a barrel, while the Brent contract fell 2% to $83.02 a barrel. 

Inflation data of late has proved to be stickier than expected, prompting traders to fret that the Federal Reserve, and the European Central Bank for that matter, will continue to hike interest rates, potentially to the detriment of economic growth later in the year.

Two Federal Reserve officials – Governor Chris Waller and Atlanta Fed President Raphael Bostic – said on Thursday that they’re open to raising rates by more than they previously thought would be necessary, pushing market expectations of the ‘terminal’ fed funds rate in this cycle ever closer to 5.5%.

“Positive economic data from the U.S. and firm inflation pose a risk that the Fed rate hike cycle may continue for longer than initially estimated,” analysts at ING said, in a note.

Additionally, official data pointed to a 10th consecutive week of crude stock builds in the United States, rising by 1.2 million barrels last week to just over 480M barrels, their highest level since May 2021.

However, this has been balanced out by optimism over a Chinese economic recovery after the Asian giant ditched its zero-COVID mobility restrictions. 

Activity in China’s services sector expanded at the fastest pace in six months in February, a private sector survey showed on Friday, and this followed Wednesday’s data showing the country's manufacturing activity expanded at the fastest pace in more than a decade.

China is the largest importer of crude in the world, and Saudi Aramco (TADAWUL:2222) has described the country’s consumption as “very strong”.

Additionally, the equivalent data in Europe showed that the region’s services sector remained in expansionary territory, ahead of the release of the U.S. ISM non-manufacturing index later in the session.

Numbers from Baker Hughes about the number of working oil rigs in the U.S. and crude positioning data round off the week, as usual.