Why are oil traders scared of the Fed?

Federal Reserve, geopolitics threatens US Dollar's seasonal year-end slump

For the Fed’s November 1 announcement, traders are hoping that the central bank will not up its benchmark rate beyond the current 5.25-5.5% range, a 22-year high.

But beyond the rate decision itself, traders will focus on the Fed’s commentary.

Forecasts by the US central bank from September showed that a majority of its policymakers see the Fed's benchmark overnight interest rate ending this year at 5.6%, which implies one more interest rate hike in the next three months. They also now anticipate an end-of-2024 policy rate of at least 5.1%, half a percentage point higher than they projected three months ago.

A high rate of interest is negative for crude as it slows economic activity and strengthens the US dollar.

Traders are also keeping an eye on economic data.

Also Read: European Central Bank presses pause after barrage of hikes to tame inflation

Today, China’s factory activity, as measured by its purchasing managers’ index, unexpectedly shrunk, outlining continuing troubles for the world’s second-largest economy.

And tomorrow (November 1), the US non-farm payrolls data is expected, where the economy is seen adding 182,000 jobs in October, as opposed to 336,000 in September. Analysts also expect the unemployment rate to remain at 3.8% and wage growth to slow to 4%, a post-pandemic low.

Weak jobs data indicating a slowing economy will act as a dampener for oil prices. Analysts believe that the Fed has limited options to combat the slowdown. The central bank continues to battle inflation, which has come off a high of 5.3% in February to 3.4% in September but remains above the central bank's target of 2%.

The World Bank recently said oil could fall to as low as $81 as global growth slows.

Also Read: US Fed minutes flag high rates for "some time" while risks shift

This means that as markets head into the Fed meeting, the likely scenario that could put crude oil on an upward trajectory is the central bank saying it expects prices – and hence rates -- to come down sooner than expected.

Barring that, or the Middle East conflict snowballing into a regional war, crude oil will likely remain weak.