Oil Tanks Ahead of US Fed Meeting

Ahead of an expected slowdown in rate hikes, crude oil prices fell earlier on Monday, starting off the new month on May on a weak note after the U.S. benchmark eked out an April gain to snap a string of five straight monthly declines.

Worries about the potential for central bank tightening to spark a global slowdown or recession continued to hang over the market, analysts said, ahead of a Federal Reserve policy decision on Wednesday, while data on activity in China’s manufacturing sector disappointed.

The Organisation of Petroleum Exporting Counties and Allies (OPEC+) production cuts announced at the beginning of April failed to provide a lasting bounce for crude, with upside capped by worries over the global economic outlook.

China’s official purchasing managers index unexpectedly fell to 49.2 in April from 51.9 in March, according to news reports. A reading below 50 indicates a contraction in activity.

Meanwhile, investors expected the Federal Reserve to raise its key lending rate by a quarter of a percentage point when it completes a two-day policy meeting on Wednesday.

Investors will be on the lookout for indications that the Fed will subsequently be prepared to pause the rate cycle as it assesses the economic outlook following a series of aggressive rate increases.

The seizure and sale of First Republic Bank (FRC) on Sunday did not appear to be sending significant ripples through markets. JPMorgan Chase won an auction to take over the troubled lender, the Federal Deposit Insurance Corp. announced early Monday morning.

The rally kicked off in early April by the OPEC+ production cuts ran into stiff resistance at the 200-day moving average for WTI in the second half of the month, leaving crude in a bearish trend, said Alex Kuptsikevich, senior market analyst at FxPro, in a note.

Crude has now dropped back below its 50-day moving average. Oil’s moves near key moving average shows the market tone remains bearish, he said, “with deteriorating macroeconomic conditions.”

That leaves the $65 to $67 a barrel area as an attractive target for bears, Kuptsikevich said, but warned that sellers should remain cautious because a sustained slide in prices would be almost certain to attract OPEC’s attention.

Gains in oil prices on Friday had helped WTI crude eke out an April gain of 1.5%, while Brent suffered a fourth straight monthly decline.

“Now that the widely anticipated gap between the March close and April market open has been ‘filled,’ we can look ahead and assess what to expect next from oil,” analysts at Sevens Report Research wrote in Monday’s newsletter.

Oil’s recent decline saw crude futures fill the gap left on the daily price chart after the OPEC+ production cut announcement in early April — bringing prices back to down to levels seen before the announcement.

On the charts, the new year-to-date high achieved in mid-April has added a “bullish bias to the market and a rebound back towards $80 is increasingly likely,” the Sevens Report analysts said.

Still, “on a longer time frame, economic worries will remain a major headwind for oil in 2023, leaving risks for a collapse to new lows elevated.”