Oil tanks again as U.S. crude beneath $70 on economic worries

Investing.com - Oil markets tumbled more than 4% Wednesday extending the previous day’s 5% plunge, after the Federal Reserve announced a tenth straight post-pandemic rate hike without any clear indication that it would halt further increases from June.

For its May policy decision, the Fed added a quarter point to U.S. rates, bringing them to a peak of 5.25% from the 0.25% high they stood at three years ago.

The central bank also dropped the language that it had used in recent months that it "anticipates" more policy firming may be appropriate to attain a "sufficiently restrictive" stance. That was a signal to economists that the Fed will likely pause on rate hikes from June  if inflation pressures drop meaningfully. Inflation, trending at between 4% and 5% per year, depending on the indicator, has already fallen from a four-decade high of above 9% tracked by the key Consumer Price Index in June last year.

Yet, Fed Chair Jerome Powell refused to commit outright to a June rate pause, saying “ongoing assessments” on the economy will influence that decision.

“Credit tightening is about to cripple the economy and it appears that as long as we don’t get a perfect storm of hotter-than-expected labor and inflation data, the Fed will keep rates on hold for at the very least till the end of the year,” said Ed Moya, analyst at online trading platform OANDA.

Credit worries aside, the U.S. banking sector exhibited new signs of stress this week with the closure and takeover of First Republic Bank. Adding to concerns were a potential debt default by the United States and readings on US factory orders and durable goods that came in lower than expected.

New York-traded West Texas Intermediate, or WTI, crude for June delivery settled Wednesday’s trade down $3.06, or 4.3%, at $68.60 per barrel. The session low was $67.97. On Tuesday, WTI settled down $4, or 5.3%.

Chart-wise, WTI seems to have hit desired lows and a rebound could emerge soon, Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said.

“If selling intensifies, the decline in WTI can extend to the 200-week SMA of $67,” Dixit said, referring to the Simple Moving Average. “But there’s also the chance of a recovery towards the $71.80- $72.60 levels as the market is quite oversold as it is.”

London-traded Brent for July delivery settled down $2.99, or almost 4%, at $72.33. The session bottom was $72.89. In the previous session, Brent settled down $3.99, or 5%.

Wednesday’s selloff in oil also came after the U.S. Energy Information Administration, or EIA, reported a modest drawdown in crude stockpiles for last week versus expectations. The agency also cited a surprise build in gasoline inventories and a slighter larger than expected drop in distillate balances.

U.S. crude inventories fell by almost 1.3 million barrels last week, declining for a third straight week and more than the stockpile drop of 1.088 million barrels forecast by analysts. But the draw was way below the previous week’s stockpile decline of 5.054M.

On the gasoline inventory front, the EIA is expected to cite a draw of  1.157M barrels versus the previous drop of 2.408M barrels for the week to April 14. Automotive fuel gasoline is the No. 1 U.S. fuel product.

With distillate stockpiles, the EIA is expected to report a 1.084M barrel draw, against a decline of 0.576M in the prior week. Distillates are refined into heating oil, diesel for trucks, buses, trains and ships and fuel for jets.

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