Oil prices fell again in early European trading Thursday after the Federal Reserve raised interest rates for the first time in three years, while expectations that Saudi Arabia could restore some disrupted export capacity eased immediate concerns over Middle Eastern supplies.
Brent crude futures fell 1.4% to $104.31 a barrel, while West Texas Intermediate declined 1.1% to $100.28 a barrel. Both benchmarks were down Wednesday, with Brent settling 2.7% lower and WTI losing 3.2%.
The Fed unanimously raised its benchmark federal-funds rate range by a quarter point to between 3.75% and 4%, beginning to take back cuts it made last year as policymakers seek to contain elevated inflation. Most Fed officials projected at least one more rate increase this year.
Higher interest rates can weigh on economic activity and, in turn, oil demand.
The softer oil prices also reflect growing optimism that the disruption to Middle Eastern crude exports can be contained, according to Samer Hasn at XS.com. Saudi Arabia is shifting crude loadings away from its out-of-service Yanbu port, while barrels continue to flow through the Strait of Hormuz under U.S. protection and some Saudi flows have resumed, he said.
Still, the security situation around Saudi Arabia remains volatile. The Iran-backed Houthis said Wednesday that they shot down a Saudi F-15 fighter jet over Marib, an oil-and-gas-producing region in Yemen, and released footage that appeared to show aircraft wreckage.
Saudi Arabia hasn't officially confirmed the loss, but two people familiar with the incident said a Saudi aircraft had been downed, The Wall Street Journal reported.
The Houthis have also seized territory in recent weeks, including an island in the Bab al-Mandeb Strait, strengthening their ability to interfere with Saudi Red Sea oil shipments.
Meanwhile, U.S. commercial crude inventories fell by around 640,000 barrels last week, a smaller draw than expected, while gasoline and distillate inventories increased. The Energy Information Administration's latest data cover the week ended Sept. 11.
Shipping through the Strait of Hormuz remains sharply below prewar levels, according to an International Energy Agency monitor updated Wednesday. An average of 47 ships a week transited the strait between Feb. 28 and Sept. 13, down from 456 between Jan. 1 and Feb. 27, while weekly cargo capacity fell to 1.4 million metric tons from 16.9 million tons. The IEA cautioned that GPS jamming and vessels switching off their transponders mean the data likely understates actual traffic.
The bigger question for the oil market is how much consumption will ultimately have to adjust if Middle Eastern supplies remain constrained. Global oil demand has been surprisingly resilient relative to the scale of the supply shock, analysts at Capital Economics said, with inventory drawdowns allowing consumption to fall by much less than supply during the early stages of the crisis.
Crude exports through the Strait of Hormuz have risen to around 8 million barrels a day, or 57% of prewar volumes, but that increase could be outweighed by disruption to exports from Yanbu following the attacks and closure of the East-West Pipeline, Capital Economics said. With demand remaining resilient, oil prices may need to stay elevated for longer to bring consumption back in line with constrained supply.
China's buying could make that adjustment more difficult. Chinese crude imports rose to 9 million barrels a day in August from 7.2 million in June, while ship-tracking data for the first half of September point to a further gradual increase. If Chinese import demand continues to recover, more of the burden of adjusting global consumption would fall on the rest of the world, Capital Economics said.