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Oil Slips as Investors Weigh Demand Outlook Ahead of Fed Meet

·2 min read

(Bloomberg) -- Oil fell in a thin trading session as broader markets brace for an aggressive rate hike from the Federal Reserve.

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West Texas Intermediate dropped 1.8% to settle below $95 a barrel. Broader markets dropped after a slew of tepid earnings showed inflation was already starting to batter consumer behavior. High gasoline prices are also causing Americans to alter their driving habits. The Federal Reserve is expected to raise rates Wednesday, which many fear could tip the economy into a recession.

“Gasoline demand weakening at what should be a seasonally strong time, underscores fears of stagflation and what that might do to the economy,” said Stewart Glickman, Deputy Director of Equity Research at CFRA Research in New York.

Despite the bearish session, time spreads are indicating scarce near-term supply and Morgan Stanley noted in a recent report that the market remains tight. Still, the investment bank trimmed its crude oil price forecasts this year and into 2023, citing reduced demand projections.

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Oil has been gripped by bouts of volatility amid low liquidity in recent months as investors juggle competing supply and demand outlooks. In 78 trading days since the start of April, WTI volumes have only been above the 200-day average on six occasions, underscoring the relative lack of activity in the market.

WTI is still up almost 30% this year, in part due to upended trade flows from Russia. The gap between the US benchmark and Brent widened to more than $9 a barrel, indicating supply tightness is more pronounced in Europe than the US. American gasoline demand has declined in the height of the typical driving season as expensive gasoline prices have caused Americans to alter their habits.

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“Market liquidity remains thin as exchange margins remain high,” said Dennis Kissler, senior vice president of trading at BOK Financial. “Fuel demand will remain key and for the last two weeks we have seen a definite decrease.”

The market is steeply backwardated, a bullish pattern marked by near-term prices commanding a premium to later-dates ones. Brent’s prompt spread was $4.77 a barrel in backwardation, compared with $3.83 at the start of July.

The tight market may get some relief from recovering Libyan output but the country’s contribution will probably be volatile given the potential for conflict and unrest to flare quickly. Supply from the OPEC producer has climbed back above 1 million barrels a day.

Additionally, the US is offering 20 million barrels of crude from its emergency reserves in its latest tender.

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