By Oil prices fell from their recent highs last week as investors resorted to booking profits ahead of the US Federal Reserve two-day meeting, which begins on Tuesday.
Prices had climbed sharply last week on concerns over disruptions in Russia and Iranian exports. This limited the fall on Monday.
“After last week’s +6% rally, and with crude oil trading towards the top of recent range highs, we are likely seeing some light profit-taking,” IG market analyst Tony Sycamore told Reuters.
Also it is likely a lot of trading books at banks and funds shut up shop at the end of last week and have reduced appetite for positions over the festive season.
At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $70.45 per barrel, down 1.2%. Brent crude on the Intercontinental Exchange was at $74.18 per barrel, down 0.5% from the previous close.
Oil prices: sanctions risks
Oil prices rose sharply last week, particularly on Thursday on fears of disruption in supply from Russia and Iran.
US Treasury Secretary Janet Yellen told Reuters on Friday that the country is looking at further sanctions on “dark fleet” tankers.
She also said that the US will not rule out sanctions on Chinese banks as it seeks to reduce Russia’s oil revenue and access to foreign supplies to fuel its war in Ukraine.
Additionally, fresh sanctions on entities trading Iranian oil have driven up crude prices for China.
China is the largest consumer of Iranian oil supply.
Under the incumbent US President Joe Biden, the administration did not pursue stricter compliance of sanctions on Iran.
“However, with US President-elect Donald Trump set to enter the White House in January, there is potential that he will take a more hawkish stance against Iran, like he did in his first term,” Warren Patterson, head of commodities strategy at ING Group, said.
According to Patterson, if more sanctions were imposed on Iran, supply could drop by 1 million barrels per day.
Patterson said:
However, with almost all Iranian exports heading to China, it may be challenging to significantly reduce these flows.
Interest rates expectations
Interest rate cuts by global central banks had also supported crude prices last week.
Key central banks in Canada, Switzerland, and Europe cut interest rates last week, which aided sentiments.
Lower interest rates bode well for commodities as it reduces the borrowing costs for the public, while also increasing liquidity in the economy.
In addition, the market also eagerly waited for the outcome of the Fed’s policy meeting on Wednesday.
Traders were expecting the Fed to cut rates by 25 basis points, which could demand for oil in the short term.
However, poor demand concerns from China next year, and an oversupply in the market continued to weigh on investors’ sentiments.
The International Energy Agency expects the crude oil market to be oversupplied to the tune of nearly 1 million barrels per day next year.
Even with the Organization of the Petroleum Exporting Countries and its allies extending their planned increase in production from January by three months, the oil market will remain oversupplied, the IEA said last week.
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