Oil prices tumble on mounting early Fed taper fears

Oil prices plummeted to their lowest level in four months today, driven by mounting concerns that the US Federal Reserve could rein in the wave of monetary support it unleashed in response to the Covid crisis earlier than expected.

International benchmarks WTI and Brent Crude dipped 3.53 per cent and 3.03 per cent to $63.15 and $66.16 respectively.

Expectations that demand for oil could contract sharply over the coming months are strengthening after the Fed released minutes detailing discussions at its latest Federal Open Market Committee meeting in July.

The minutes showed a majority of Fed ratesetters are open to winding down the wave of ultra-loose monetary policy measures the central bank unleashed in response to the Covid crisis this year, earlier than markets’ expectations.

A tightening of monetary policy from the Fed would stem the flow of cheap money circulating globally, which would hit demand for oil.

A resurgence in new Covid cases, particularly in Asia, driven by the more transmissible Delta varient is fuelling fears that large oil consuming nations may reimpose restrictions on economic activity, which would likely put downward pressure on oil demand.

Jeffrey Halley, senior market analyst for Asia Pacific at OANDA, said: “The downside remains the weaker side for oil prices which are in danger of seeing another capitulation sell-off.”

“The overnight release of the FOMC Minutes provided some drama, with the committee members mostly lining up behind a tapering of quantitative easing sooner rather than later.”

“The procession of Fed officials making up the FOMC who have made hawkish comments since the FOMC meeting, especially after the blockbuster Non-Farm Payrolls released at the start of August, would appear to swing the likelihood of tapering in December.”