Oil prices fell sharply lower on Wednesday to below $45 a barrel, the first time hitting the low-point since March of this year. This happens after a bigger-than-expected fall in crude inventories failed to soothe worries about a global supply glut.
Earlier this week, the price of West Texas Intermediate crude-oil futures was as high as $46.70 a barrel, after weekly data showed U.S. commercial-crude inventories fell by 4.4 million barrels. Wednesday’s session wiped out all of those gains, however, as oil futures traded as low as $44.88 a barrel.
Anticipated Interest Rate Hike Affecting Oil
One big factor in the ever-changing crude-oil situation is the looming interest rate hike by the Federal Reserve. According to Michael Poulsen, an oil analyst at Global Risk Management, “higher interest rates could limit growth in the huge oil-consuming country—affecting oil demand as well—in an already oversupplied market.” On Tuesday, Federal Reserve Bank of Atlanta President Dennis Lockhart said that the U.S. economy is ready for a September move.
A rate hike affects the entire U.S. economy – but it especially changes the crude-oil spectrum. High oil prices can drive job creation and investment as oil companies have the freedom to exploit higher-cost shale oil deposits. The downside to a high price is an obvious one - higher transportation and manufacturing costs for businesses and consumers. On the other hand, lower oil prices hurt oil activity, while benefitting sectors where fuel costs are a main concern. And for these reasons, our most-used measure of the consumer economy, CPI, also sways on oil prices.
Other factors that may be changing oil prices are the recent nuclear deal with Iran, China’s contracting economy, and the strong U.S. dollar. Oil prices plunged into a bear market last month and are off more than 50% from last year.
The bottom line is, oil will always be considered an extremely important commodity. It provides energy – energy is life. Therefore, oil will always prove essential for the global population, and it is anticipated to bounce back to its original glory. The days when crude oil is worth more than $140 a barrel may be behind us, but a recovery is inevitable.