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Oil Sees First Major Drop in a Month on Reflation Trade Unwind

·2 min read

By Barani Krishnan

Investing.com - Oil prices had their first meaningful drop in a month on Thursday after a selloff across commodities triggered by the Federal Reserve’s admission that it was looking for an appropriate exit for its $120 billion of monthly stimulus which has juiced markets through the COVID-19 pandemic.

West Texas Intermediate crude, the benchmark for U.S. oil, settled down $1.11, or 1.5%, at $71.04 per barrel. It was WTI’s biggest slide on the day since a 2.1% drop on May 20.

Brent crude, which acts as the global benchmark for oil, finished down $1.31, or 1.8%, at $73.08 per barrel, for what was also its sharpest one-day loss in nearly a month.

“The drop was mostly about big unwinds in the reflation trade,” markets commentator Adam Button said in a post on ForexLive.

Commodities tumbled across the board after the Dollar Index rose toward the 92 level, rallying for a third day in row, with Thursday’s run-up fired by expectations that the Federal Reserve will raise interest rates at least twice by end of 2023 to 0.6% from current levels of zero to 0.25%.

The Fed also signaled at the end of its monthly policy meeting on Wednesday that it was looking out for data on when to start tapering its monthly asset purchase of $120 billion.

The central bank has been buying at least $80 billion in Treasury bonds and $40 billion in mortgage bonds each month to support credit markets and the economy since the COVID-19 outbreak last year.

Until Thursday’s slump, oil prices had been on a tear, setting intraday highs almost daily over the past two weeks on bets for huge summer demand periods for fuel in the U.S. as the country reopens fully from Covid-19 lockdowns.

In Thursday’s trade, WTI reached $72.99, a high last seen in October 2018, while Brent got to $74.96, a peak not seen since April 2019.

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