Oil prices falls from 7-year peak, tension over Russia overshadows US Fed tightening

yousef27 January 2022Last Update : 2 years ago
Oil prices falls from 7-year peak, tension over Russia overshadows US Fed tightening

Oil prices fell on Thursday after Brent crude hit a seven-year high above $90 a barrel as the market balances concerns about tight supply around the world and expectations that the US Federal Reserve will tighten monetary policy soon.

Brent crude futures fell 62 cents at settlement to $89.34 a barrel, while US West Texas Intermediate crude futures fell 74 cents to $86.61 a barrel at settlement after a volatile session in which the two crudes fluctuated between positive and negative areas.

Prices had risen on Wednesday, as Brent crude rose above $90 a barrel for the first time in seven years amid tension between Russia and the West. Threats to the UAE from the Yemeni Houthi movement have increased the oil market turmoil.

Russia, the world’s second-largest oil producer, is at loggerheads with the West over Ukraine, raising fears that energy supplies to Europe could be disrupted, although the concerns center on gas supplies rather than crude.

“The market is very volatile with news of the development of the situation between Russia and Ukraine. There is uncertainty as to what will happen,” said Phil Flynn, chief analyst at Price Futures Group.

Oil prices

But prices were also hit after the US Federal Reserve said on Wednesday it was likely to raise interest rates in March and planned to end bond purchases in the same month to curb inflation.

The dollar rose after the announcement, making oil more expensive for buyers holding other currencies. On Thursday, the dollar index rose to its highest level since July 2021.

Futures in New York slipped 0.9%. Oil has rallied most of this week with physical supplies appearing extremely tight. Key swaps tied to the North Sea market are trading at their firmest since 2019, while timespreads are trading at their strongest level since November. Despite the underlying strength, the market wasn’t immune to the whipsaw movements buffeting most major assets.

“This afternoon’s oil weakness was primarily a function of a soaring U.S. dollar that the oil market could no longer ignore,” said Ryan Fitzmaurice, a commodities strategist at Rabobank. But as it stands, fundamentals in oil balances are tight, so even a small escalation in the Ukraine/Russia conflict could result in an oil supply shock for Europe, he added.

Traders are tracking events in Ukraine on concern that Russia may launch an invasion after massing thousands of troops on the border, potentially disrupting energy supplies. Moscow has denied it plans to invade, but Citigroup Inc. said a rise in crude volatility is a sign that the market is pricing in an increased political risk premium, potentially of at least $5 a barrel.

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