Oil prices fell on Monday as concerns over the economic impact of the Federal Reserve’s potential to raise interest rates and weak Chinese manufacturing data offset support from new OPEC+ supply cuts set to take effect this month.
Brent futures for July delivery were down at 0547 GMT by 56 cents, or 0.7%, to $79.77 a barrel, while West Texas Intermediate (WTI) crude lost 63 cents, a 0.8% drop, to trade at $76.15.
U.S. consumer spending was flat in March as an increase in services spending was offset by a decline in goods, but persistent strength in underlying inflation pressures could prompt the Federal Reserve to raise interest rates again.
The Fed is expected to raise interest rates another 25 basis points this week. The US central bank has increased the policy rate by 475 basis points from near zero since March last year to the current range of 4.75%-5.00%.
The rate hikes to be announced by the Fed this week are expected to lead to an increase in near-term price volatility.
Next week, the Reserve Bank of Australia is expected to extend its rate-raising pause on Tuesday, and the European Central Bank may surprise with a big half-point increase on Thursday.
Meanwhile, China’s manufacturing purchasing managers index (PMI) fell to 49.2 from 51.9 in March, and the official data released on Sunday fell below the 50 points that separate expansion and contraction in activity on a monthly basis.
Factory activity in Japan, the world’s third-largest economy, contracted for the sixth consecutive month in April, but the manufacturing sector was heading towards stability with a slower decline in new orders.
Investors remain cautious amid mixed economic signals. Brent crude has been tracking broader markets in recent sessions as a host of economic data has added more uncertainty about the outlook.
Starting Monday, oil production cuts of around 1.16 million barrels per day went into effect, in a surprise move last month by the Organization of the Petroleum Exporting Countries (OPEC) and allies, including Russia.
After the recent OPEC supply cuts effective from May, the oil market is likely to be in deficit for the remainder of the second quarter. When this decision is combined with the seasonal increase in OECD demand and the possible increase in Chinese demand, it would not be wrong to expect prices to increase.