Fears Over Interest Rate Hikes
In the wake of anticipated bank rate hikes, crude traders nervously extended oil losses on Friday. The San Francisco Federal Reserve Bank hinted that two more hikes would occur this year, leading to a 0.4 percent dip in Brent to $73.85 per barrel and a 0.5 percent fall in West Texas Intermediate to $69.16. Both benchmarks dropped approximately 4 percent for the week, marking their most significant declines since May 5. According to Dennis Kissler, Senior Vice President of Trading at BOK Financial, the converging elements of rising interest rates in the European Union and weak stimulus numbers from China have triggered a “risk back off” mentality in crude trading.
Interest Rates and the Global Market
Mary Daly, the San Francisco Bank president, explained that the possible rate hikes are “very reasonable,” stating that it’s “prudent policy to slow the pace of policy as you near the destination” of where rates ought to settle. In addition to the looming rate hikes, investors faced further financial trouble due to Germany’s sluggish economic activity, with the nation’s output losing even more momentum in June than anticipated. There are also strong indications that France’s economy shrank during the second quarter.
China’s Stimulus Struggles
As for China, investors seem to be holding out for a substantial economic stimulus before committing to any aggressive bets on the country’s recovery. Andy Maynard, Head of Equities at China Renaissance, expressed disbelief at the possibility of further setbacks, opining that the market appears to have already factored in all negative outcomes. Further compounding China’s challenges, aggregate financing fell to 1.6 trillion yuan in May, considerably below the anticipated 1.9 trillion yuan.
Oil Patch Woes: Higher Rates and Increased Costs
The primary anxiety driving market fluctuations remains the prospect of heightened rates. Robert Yawger, Director of the Futures Division at Mizuho Securities USA, underscored that higher rates result in higher costs of carry, making everything from storing to shipping oil more expensive. As a result, the fear of slowed economic activity is placing immense pressure on the oil industry.
