LONDON, Jan 30 (Reuters) – Rising tensions in the Middle East over a drone strike in Iran offset hopes of higher demand from China, prompting major central banks to raise interest rates and boosting Russia’s strength. Oil prices extended their decline on Monday as export signals offset.
Investors expect the US Federal Reserve to hike rates by 25 basis points on Wednesday, followed by a 0.5 percentage point hike by the Bank of England and the European Central Bank the day after. Any deviation from that script is a shock.
“The market’s cautious risk-off mood ahead of the central bank meeting is hurting risk assets, including oil,” said Fiona Cincotta, an analyst at City Index.
Brent crude fell 94 cents (1.1%) to $85.72 a barrel by 1436 GMT, while US Central West Texas crude fell $1.40 (1.8%) to $78.28.
The market also came under pressure indicating strong Russian supplies despite the European Union’s ban and the G7 price cap imposed on Russia’s invasion of Ukraine. Both oil benchmarks posted their first weekly losses in three weeks last week.
In addition to the central bank meetings, the focus will also be on Wednesday’s gathering of key ministers from the OPEC+ group, which includes the Organization of the Petroleum Exporting Countries (OPEC) and its allies led by Russia.
An OPEC+ panel meeting is unlikely to tweak output policy, three OPEC+ representatives told Reuters on Monday.
“The ship isn’t really in a stormy sea right now, so there’s no need to shake things that aren’t moving around,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Oil broker PVM said OPEC+ could “surprise the market with a small rate cut”, adding that it was unlikely to tweak policy.
Earlier Monday, tensions in the Middle East drove oil prices higher after a drone strike in Iran.
It is not yet clear what is happening in Iran, but any escalation in Iran could disrupt oil flows, said Stefano Grasso, senior portfolio manager at 8VantEdge in Singapore.
Expectations of increased demand from China have pushed oil prices higher in 2023. China, the world’s largest oil importer, pledged over the weekend to boost consumption to support demand.
Reporting by Alex Lawler Additional reporting by Swati Verma, Florence Tan, and Emily Chow. Edited by Louise Heavens, David Goodman, Emelia Sithole-Matarise
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