Bad News For Oil Prices As Economists Predict Aggressive Action From The Fed

Interest rate hikes by the Federal Reserve as it struggles to rein in inflation have spurred expectations of a recession and the related negative implications for oil prices. Now, economists expect the Fed to hike higher than previously thought and fears of a recession are growing.

A poll conducted by Reuters suggested that the Fed could raise interest rates to a higher terminal point than was forecast just two weeks ago after the U.S. central bank hiked the benchmark rate by 75 basis points for the third time in a row.

After this move, the majority of economists polled said they expected a fourth hike of 75 basis points in November and another, smaller, hike of 50 basis points in December. This would bring rates to between 4.25 percent and 4.50 percent.

The first and most fundamental implication of this is an increase in the risk of a recession, the likelihood of which the economists polled by Reuters have put at 45 percent for the coming 12 months. The likelihood of a recession occurring over the next two years is even higher, according to the poll, at 55 percent.

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 75-basis-point rate hike, therefore, would not be welcomed by the oil industry.

At the same time, OPEC+ is keeping its finger on the oil market’s pulse and stands ready to start cutting production if prices fall below a level it considers comfortable. It appears 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 per barrel, OPEC+ is considering cuts.

By Irina Slav for Oilprice.com