Oil Dips in Volatile Trade as Pendulum Swings on Fed’s Upcoming July Hike

© Reuters.

By Barani Krishnan

AiVIF.com -- Crude prices fell on Thursday after swinging more than $7 a barrel as markets from oil to equities debated whether the Federal Reserve will impose a record rate hike to curb runaway U.S. price pressures or continue to prioritize growth over inflation.

New York-traded West Texas Intermediate, or WTI, crude settled down 52 cents, or 0.5%, at $95.78 per barrel. WTI’s low of the day was $90.58 versus its peak of $97. The U.S. crude benchmark has lost 10% since the start of July.

London-traded Brent crude settled down 47 cents, or 0.5%, at $99.10 a barrel. The global crude benchmark registered a session low of $95.42 versus a high of $101.21. For July, Brent is down 9%.

Charts showed U.S. crude may be vulnerable to a plunge towards $83 after coming within less than a dollar of breaking the key $90 support.

“If WTI goes toward the 200-Day SMA of $93.90 and the 50-week EMA of $92.70 on a daily closing basis, we will continue to see the bearish trend scenario that targets vertical support levels of $85 and $83,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

Crude prices rebounded from their lows after Fed Governor Chris Waller said the central bank can’t overdo rate hikes despite shocking price pressures. Waller said he would support a 75-basis point hike at the Fed’s upcoming July 27th decision on rates, over market bets for a 100-basis point increase. 

The remarks from one of the Fed’s more hawkish members calmed investors who had been on tenterhooks since the Consumer Price Index for the year to June came in on Wednesday at a new four-decade high of 9.1%. 

The CPI data was followed up on Thursday with the Producer Price Index’s 11.3% rise during the year to June —  the largest such increase since a record 11.2% jump registered during the 12 months to March 2022. 

St. Louis Fed President James Bullard, known as being a super hawk, also soothed investors by opting for a 75-bps hike in the upcoming July 27th decision on rates.

Yet, both Walle and Bullard said they would be open to doing more on rates if data called for it.

“For me, a 75-basis point increase at this meeting puts us to neutral,” Waller said. “However, if incoming data over the next two weeks shows that demand remains strong, I would incline toward a bigger rate hike.”

“Neutral” is Fed speak for getting inflation back to its target of 2% a year.

Bullard said it was plausible for the Fed funds rate to be “higher than 4% by the end of the year if data continues to come in in an unfavorable way”.

Fed funds rates are currently at a high of 1.75%. With four more rate decisions due before the year-end, there would have to be cumulative increases of 2.25% to get to 4%, with a 100-basis point hike likely anywhere between.

The Fed has been trying to manage price growth without implementing excessive rate hikes. But its task is becoming harder with each galloping print on inflation.

Many economists say the Fed kept rates “too low for too long” and could push the United States into a recession in its fight to quickly bring inflation under control.

The central bank left interest rates at between zero and 0.25% for two years during the pandemic and only raised them this year in March.

U.S. gross domestic product already declined 1.6% in the first quarter. A negative second quarter GDP is all that is needed to technically send the economy into a recession.