(Bloomberg) — Oil extended its drop to the lowest level since May after the U.S. Federal Reserve on Wednesday signaled it was set to start tapering asset purchases within months, hurting commodities and lifting the dollar.
West Texas Intermediate futures fell as much as 4.3% amid a broader commodity selloff as prospects of reduced stimulus shook markets. Crude is set to decline for the sixth straight day, a run of losses not seen since February of last year. The market is also struggling with the delta coronavirus variant menacing Asia, leading to worsened demand indicators including a slip in China refinery output.
“The dollar is seeing considerable strength as the Fed moves to cool the economy,” said John Kilduff, a partner at Again Capital LLC. “Oil was already seeing downward pressure as the market reeled from softened demand coming out of China, and waning commodities appeal is encouraging the slump further.”
Oil’s rally in the first half of the year has lost momentum since July amid the threat to demand posed by the spread of the delta variant. At the same time, OPEC+ pushed ahead with gradually restoring supplies. The combination of factors has led leading analysts to lower price forecasts for the last half of the year.
To cushion the U.S. economy from the blow inflicted by the pandemic, the Fed has been buying $120 billion of assets every month, buoying commodities. The minutes of the bank’s July meeting showed a potential pullback in its monthly bond purchases, as most participants now judged it could be appropriate to start reducing the pace of stimulus.
“Economic growth concerns, stronger dollar and a risk-off environment are not helping oil,” said Giovanni Staunovo, an analyst at UBS Group AG. “Demand will continue to recover in an uneven way over the coming weeks and the oil market remains under-supplied. So that should still support prices down the road.”
Road traffic remains depressed in various Southeast Asian countries as various levels of lockdowns are still in place. “Indicators for consumption coming out of the region have global influence,” said Stewart Glickman, energy equity analyst at CFRA Research. “Where China goes, investors follow.”
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