Oil Prices Soar, Fed Raises Rates as Brent Hits $83.40/bbl

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Oil prices climb for various reasons, including supply and demand imbalances, geopolitical tensions, and market speculation. When the demand for oil increases faster than the rate at which it can be produced, prices tend to rise. Conversely, if the supply outpaces the demand, prices may fall.

Geopolitical events, such as conflicts in major oil-producing countries, can also impact oil prices by disrupting supply and causing market uncertainty. Market speculation, or buying and selling oil contracts based on expectations of future prices, can also drive up prices.

On 1 February 2023, the Federal Reserve raised interest rates by 25 basis points, leading to the rise in oil prices in early Asian trade and lowering the dollar value. Brent crude oil LCOc1 hit a new high of $83.40 a barrel, which means it rose by 0.7% or 56 cents, and West Texas Intermediate US crude rose to $77.06, so by 65 cents or 0.8%. The move illustrated the central bank’s determination to persist in its campaign against inflation through sustained raises in borrowing costs. The Fed expressed its intention to carry out ongoing increases in interest rates in the future.

The US Central Bank mentioned in a statement recently that although inflation has relaxed, it remains raised. The statement makes it clear that the progress made in lowering the pace of inflation from the historic 40-year peak reached last year.

The value of a currency can be influenced by changes in oil prices because oil is traded in US dollars globally. When oil prices rise, the demand for US dollars also increases, as oil-importing countries must exchange their local currencies for US dollars in order to purchase oil. This increased demand for US dollars can put downward pressure on other currencies.

If oil prices rise and the demand for US dollars increases, this could cause the value of the euro to decrease relative to the US dollar. As a result, the price of oil in euros would also increase, even though the price of US dollars remains constant. This, in turn, could cause inflation in euro-dominated economies and put upward pressure on interest rates, making it more expensive for companies and consumers to borrow money.

With a weaker greenback, the US dollar-priced oil becomes cheaper for holders of other currencies. This helps in boosting its demand in return. Furthermore, the US dollar fell by 0.3%, standing at 101.15 now, and this happened in the session against a list of other currencies.

Apart from this, on 5 February, the European Union banned Russian refinery products. EU countries met on 3 February and proposed to set price caps on Russian oil products. The EU diplomats set the price caps at $100 per barrel on products that trade at a premium and crude and $45 per barrel on products that trade at a discount, such as fuel oil. Ambassadors for the 27 EU countries agreed on the proposal. This was done to limit Moscow’s funds that would be used to invade Ukraine.

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