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Oil prices plunged more than $5 a barrel on Wednesday on concerns that a sharp rise in borrowing costs due to rising interest rates could undermine economic growth.
Global benchmark Brent crude oil closed at $5.11 a barrel, down 5.6%, to $85.81 a barrel, its biggest one-day drop since August 2022. U.S. benchmark West Texas Intermediate crude fell 5.6% to $84.22 a barrel.
The sudden drop surprised investors, who just last week had been trading near $100 a barrel on strong global demand and decisions by Saudi Arabia and Russia to extend oil production cuts until the end of 2023.
“This is a fast move in the market,” said Morningstar analyst Stephen Ellis.
The decline comes in a week when soaring interest rates have gripped markets, pointing to new pressures on the economy that could weigh on oil consumption. The benchmark 10-year U.S. Treasury yield hit a 16-year high of 4.88% on Wednesday before retreating slightly in afternoon trading.
“Higher interest rate costs have the potential to weaken growth prospects in the short term and ultimately have a negative impact on oil demand,” Ellis said.
For WTI futures, which trade on CME Group’s New York Mercantile Exchange, fund managers’ net bullish positions have been increasing since the summer. “Given the length of speculation that WTI has developed, it’s been stretched like a rubber band, so some bearish triggers have led to a brief but sharp rebound in price,” said Matt Smith, an analyst at advisory firm Kpler.
The U.S. Energy Information Administration reported on Wednesday that domestic gasoline inventories rose by 6.5 million barrels last week, while crude oil inventories fell by 2.2 million barrels. Analysts at JPMorgan Chase said that in the United States, Europe and some emerging market countries, “the suppression of demand by rising oil prices has once again become apparent”.
Energy stocks were among the worst performers in the S&P 500, with ConocoPhillips, Exxon Mobil and Chevron down 4.7%, 4.2% and 2.9% respectively.
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