Oil slumped below $65 a barrel to the lowest level since May as the US Federal Reserve signaled it was set to start tapering asset purchases within months, hurting commodities and supporting the dollar.
West Texas Intermediate fell 1.4%, declining for a sixth straight day, as global benchmark Brent also retreated. Most Fed officials agreed last month that they could start slowing the pace of bond purchases later this year, according to the minutes of their July gathering, released on Wednesday.
Additional downward pressure on crude came from a mixed report on US oil and product holdings from the Energy Information Administration. Although crude stockpiles fell, there was a surprise rise in gasoline inventories, signaling fuel demand is at risk with the delta variant menacing the nation.
Oil’s impressive first-half rally has lost momentum in July and August amid the threat to demand posed by the spread of delta, including in key importer China. Gains in the dollar in recent weeks have also acted as a brake on prices, making commodities priced in the US currency more expensive. At the same time, OPEC+ has pushed ahead with gradually restoring supplies.
“The overall environment was fragile, to begin with, so I think the Fed minutes yesterday just added another layer of fragility to that,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “It’s just broad risk aversion across markets.”
Brent’s prompt time spread was 44 cents a barrel in backwardation. While that’s a bullish pattern, with near-dated prices more expensive than later-dated ones, it’s down from 57 cents a month ago.
To cushion the US economy from the blow inflicted by the pandemic the Fed has been buying $120 billion of assets every month, buoying commodities and stocks. The minutes showed that most participants now judged it could be appropriate to start reducing them.
The rapid spread of the delta variant and the curbs imposed to contain it has clouded the outlook for energy consumption. On Wednesday, US President Joe Biden beefed up his administration’s response to a nationwide surge in infections, laying out a series of actions including vaccination boosters.
