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Oil Prices Slide as stronger US dollar and rate hike concerns weigh on demand outlook

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Oil prices declined on Tuesday as a stronger U.S. dollar exacerbated concerns about fuel demand being restrained by major central banks maintaining higher interest rates for an extended period.

Brent crude futures dropped by $1.16, or 1.24 percent, to reach $92.13 per barrel at 0844 GMT, while U.S. West Texas Intermediate crude futures were down $1.13, or 1.26 percent, at $88.55.

Tina Teng, a market analyst at CMC Markets in Auckland, commented, “Fears of an economic recession may again dominate the oil market’s movement due to surging U.S. bond yields following the Fed’s hawkish stance last week.”

The world’s top economic policymakers, the U.S. Federal Reserve and the European Central Bank, have recently reaffirmed their commitment to combat inflation, indicating that tight monetary policies may persist longer than previously expected. Higher interest rates tend to slow economic growth, which can reduce oil demand.

Simultaneously, the U.S. dollar reached a 10-month high on Tuesday as higher bond yields attracted investors to the greenback.

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Since the U.S. dollar is the primary currency used for oil pricing, a stronger dollar typically dampens oil demand because it becomes more expensive for importers in their local currency.

On Monday, rating agency Moody’s warned that a U.S. government shutdown would harm the country’s credit, echoing Fitch’s downgrade of the U.S. by one notch last month due to a debt ceiling crisis.

Tamas Varga, an analyst at oil broker PVM, noted, “The threat of a US government shutdown and its potential impact on the country’s credit rating can also be a factor in oil finding it increasingly challenging to reach the magical $100/bbl target.”

However, supply remains constrained as Russia and Saudi Arabia have extended their production cuts until the end of the year. Varga added, “Oil supply is expected to underwhelm demand in the foreseeable future, and therefore any weakness, even if it is achingly startling, should not last.”

Oil prices have climbed roughly 30 percent since mid-year, primarily due to tighter supply, which has shaved 0.5 percentage points off global GDP growth in the second half of this year, according to JP Morgan.

Nevertheless, JP Morgan noted that the shock “is not large enough to threaten the expansion by itself.”

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