No Lift-Off, Says Fed: Crude Sees Worst Daily Fall In 3 Weeks
Last Thursday, Janet Yellen – the Chair of the Board of Governors of the Federal Reserve – and her team decided to keep interest rates unchanged. Following the announcement, crude price witnessed the biggest daily plunge – almost 5% to $44.68 a barrel – in last three weeks.
Why?
Everyone knows that oil has been weak since mid-2014, primarily due to oversupply of the commodity. The glut can be traced back to the shale revolution, when U.S. shale producers went on producing oil relentlessly by using modern techniques like hydraulic fracturing and horizontal drilling, without having a look on how much the demand is.
With low oil prices, demand for petroleum products has improved but not adequate enough to eradicate the obscene supply of the commodity.
In this backdrop, measures have already been taken in the U.S. to reduce excess supply. This was reflected in the recent report by Baker Hughes, one of the major oilfield service companies in the world. Per the report, the count of active U.S. drilling rigs fell for the third straight week to 644. In fact, Baker Hughes revealed that the current rig count slipped almost 50% since last October. It is to be noted that the decreasing rig count basically reflects the initiative by the U.S. shale producers to cut production.
Despite all the measures, one might wonder why crude fell instead of rising following the Federal Reserve’s “no rate hike” decision. The Federal Open Market Committee (FOMC) cited weak a global growth scenario and low inflation rate as the main reasons behind the decision.
If there was a rate hike, U.S. investors would have been tempted to withdraw funds from the choppy foreign markets and invest in domestic funds. This would have further weakened the global economy and lowered U.S. exports. Investors should note that the Fed might consider a rate hike when it meets again in October and December this year. A hike will be certain if labor-market conditions show “further improvement” and the economy achieves the targeted inflation rate of 2%.
Anyway, the recent no rate hike decision left the market anxious about worldwide economic growth particularly as the crude market is oversupplied. Eventually, West Texas Intermediate (WTI) crude saw the worst daily plunge in the last three weeks.
Energy Companies Suffer
With the plunge in oil prices, the major energy firms involved in crude exploration and production activities fell on the NYSE. This is because their business is mostly impacted by any movement in oil prices. Share prices of Royal Dutch Shell plc (RDS.A - Analyst Report), BP plc (BP - Analyst Report), Chevron Corporation (CVX - Analyst Report) and Exxon Mobil Corporation (XOM - Analyst Report) fell 3.8%, 3.2%, 2.1% and 2.4%, respectively, on the NYSE.
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