Oil Prices Fall 3% After Fed Data Raises Interest Rate Concerns

Oil prices sank more than 3% on Monday, following the decline of U.S. stock markets, as data from the U.S. service sector stoked concerns that the Federal Reserve may continue its aggressive policy tightening.

Brent crude futures settled at $82.68 a barrel, a decrease of $2.89, or 3.4%. West Texas Intermediate (WTI) crude fell $3.05, or 3.8%, to $76.93 per barrel. Before changing direction, both indices had risen by more than $2.

During the session, the WTI front-month contract began trading at a discount to future prices, a market structure known as contango that implies an oversupply.

Activity in the U.S. services sector surprisingly increased in November, and employment rebounded, providing more evidence of the economy's underlying strength as it prepares for a predicted recession next year.

The news led to losses in oil and the stock market.

In view of recent indicators of decelerating inflation, the numbers contradict predictions that the Fed will slow the rate of rate hikes.

Phil Flynn, an analyst at Price Futures group, observed, "Macroeconomic concerns regarding the Fed and what they will do with interest rates have grabbed control of the market."

Sunday, OPEC+, the Organization of Petroleum Exporting Countries and its allies, including Russia, decided to continue its October agreement to reduce production by 2 million barrels per day (bpd) from November through 2023. This action was taken to assist the market.

"Given the market's uncertainty on the impact of the EU's embargo on crude oil imports from Russia as of December 5 and the G7 price ceiling, the decision does not come as a surprise," said Ann-Louise Hittle, vice president of the consulting firm Wood Mackenzie.

In addition, the producers' association bears negative risk from the potential for a global economic recession and China's policy of zero COVID.

Last week, the Group of Seven (G7) and Australia secured an agreement to cap the price of Russian oil transported by sea at $60 per barrel.

According to Andrew Lipow, president of Lipow Oil Associates in Houston, the influence of the price ceiling on the futures market had diminished by the end of Monday's trading session.

"The market has realized that the EU has already banned the purchase of Russian oil, with a few limited exceptions, and that China and India will continue to purchase Russian crude oil, so the effect of the price ceiling would be muted," Lipow said.

Additional Chinese cities relaxed COVID regulations over the weekend, a positive sign for fuel demand in the world's largest oil importer.

This year, stringent attempts to limit the spread of the coronavirus have had a significant impact on business and manufacturing activities in China, the second-largest economy in the world.