Brent crude falls as Fed lifts rates for first time since 2023

Houthis claim shootdown of Saudi fighter jet over Yemen’s Marib region

Oil prices fell in early European trading on Thursday after the Federal Reserve raised its benchmark interest rate for the first time in three years, with traders also weighing signs that Saudi Arabia could restore some disrupted export capacity. Brent crude futures dropped 1.4% to $104.31 a barrel, and West Texas Intermediate declined 1.1% to $100.28 a barrel.

The Fed unanimously raised its benchmark federal-funds rate range by a quarter point to between 3.75% and 4%, beginning to take back cuts it made last year as policymakers seek to contain elevated inflation. Most Fed officials projected at least one more rate increase this year. Higher interest rates can weigh on economic activity and, in turn, oil demand.

Both benchmarks were already down Wednesday, with Brent settling 2.7% lower and WTI losing 3.2%, according to Dow Jones Newswires and The Wall Street Journal.

The softer prices also reflect growing optimism that the disruption to Middle Eastern crude exports can be contained, according to Samer Hasn at XS.com. Hasn said Saudi Arabia is shifting crude loadings away from its out-of-service Yanbu port, while barrels continue to flow through the Strait of Hormuz under U.S. protection and some Saudi flows have resumed.

The security situation around Saudi Arabia remains volatile, however. The Iran-backed Houthis said Wednesday that they shot down a Saudi F-15 fighter jet over Marib, an oil-and-gas-producing region in Yemen, and released footage that appeared to show aircraft wreckage. Saudi Arabia has not officially confirmed the loss, but two people familiar with the incident told the Journal that a Saudi aircraft had been downed.

The Houthis have also seized territory in recent weeks, including an island in the Bab al-Mandeb Strait, strengthening their ability to interfere with Saudi Red Sea oil shipments.

U.S. commercial crude inventories fell by approximately 640,000 barrels last week, a smaller draw than expected, while gasoline and distillate inventories increased, according to Energy Information Administration data covering the week ended Sept. 11.

Shipping through the Strait of Hormuz remains sharply below prewar levels, according to an International Energy Agency monitor updated Wednesday. An average of 47 ships a week transited the strait between Feb. 28 and Sept. 13, down from 456 between Jan. 1 and Feb. 27, while weekly cargo capacity fell to 1.4 million metric tons from 16.9 million tons. The IEA cautioned that GPS jamming and vessels switching off their transponders mean the data likely understates actual traffic.

Analysts at Capital Economics said global oil demand has been surprisingly resilient relative to the scale of the supply shock, with inventory drawdowns allowing consumption to fall by much less than supply during the early stages of the crisis. Crude exports through the Strait of Hormuz have risen to around 8 million barrels a day, or 57% of prewar volumes, but that increase could be outweighed by disruption to exports from Yanbu following the attacks and the closure of the East-West Pipeline. With demand remaining resilient, oil prices may need to stay elevated for longer to bring consumption back in line with constrained supply, the analysts said.

Chinese buying could complicate that adjustment. Chinese crude imports rose to 9 million barrels a day in August from 7.2 million in June, while ship-tracking data for the first half of September point to a further gradual increase. If Chinese import demand continues to recover, more of the burden of adjusting global consumption would fall on the rest of the world, Capital Economics said.