Interest rate hikes by the Federal Reserve as it struggles to contain inflation have boosted expectations of a recession and related negative implications for oil prices. Now economists expect the Fed to hike more than expected and fears of a recession are growing.
A Reuters poll suggested the Fed could raise interest rates to a higher terminal point than expected just two weeks ago after the U.S. central bank raised the benchmark rate by 75 basis points to the third consecutive time.
After the move, the majority of economists polled said they expected a fourth hike of 75 basis points in November and a smaller one of 50 basis points in December. This would bring rates between 4.25% and 4.50%.
The first and most fundamental implication of this is an increased risk of recession, which economists polled by Reuters put at 45% probability over the next 12 months. The likelihood of a recession occurring within the next two years is even higher, according to the poll, at 55%.
A recession is a strongly bearish scenario for oil prices and, as we have seen over the past few weeks, even talk of a recession is enough to weigh on prices. The news of another rate hike of 75 basis points would therefore not be well received by the oil industry.
At the same time, OPEC+ is keeping its finger on the pulse of the oil market and stands ready to start cutting production if prices fall below a level it deems comfortable. It appears that this level has recently risen because while two years ago the cartel said $60-70 was comfortable, now that Brent crude is trading at around $85 a barrel, OPEC+ is considering cuts.
By Irina Slav for Oilprice.com
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