Crude oil futures fell sharply after the head of the US Federal Reserve indicated that interest rates may not be cut soon, dampening expectations of a boost to fuel demand. The prices of both major benchmarks West Texas Intermediate (WTI) and Brent crude closed over 3% lower following comments from Jerome Powell.

Speaking at a conference on Wednesday, Fed Chairman Powell said that while inflation remains high, the central bank will not rush into slashing rates. He argued that the US economy is resilient enough to withstand higher borrowing costs and the job market strong. Powell stressed the importance of ensuring price stability, suggesting the Fed is committed to further rate hikes to curb inflation. 

This hawkish stance from the central bank chief was seen as reducing the likelihood of an economic downturn that could curb fuel consumption. Many traders had been betting the Fed would pivot to rate cuts later this year as high inflation starts to drag on growth. But Powell’s resolute tone signalled that containing inflation is still the priority over short-term concerns about slowing activity. 

As a result, optimism faded over a potential rebound in crude demand. Any rate cuts would make borrowing cheaper and encourage more business and consumer spending, boosting fuel usage. But with the Fed determined to keep raising rates for now, concerns grew that a recession may still be on the horizon. This would have negative implications for oil consumption globally at a time of tight supply. 

Powell’s remarks also strengthened the US dollar, adding further pressure on dollar-denominated oil prices. A stronger greenback makes crude more expensive for buyers using other currencies. The prospect of sustained monetary policy tightening in the world’s largest economy deepened worries about the demand outlook. 

While supply remains relatively tight for now due to sanctions on Russian exports, traders took profits on long positions after the Fed comments fueled demand fears. The selloff may have been exacerbated by algorithmic traders that automatically sell assets when key indicators like interest rates move against recent trends. Overall it highlighted oil’s sensitivity to monetary policy uncertainty.

Looking ahead, oil price direction will continue tracing shifts in expectations for global economic growth and fuel demand against a backdrop of geopolitical and supply chain risks. The Fed’s resolve to control inflation will be a major factor influencing market sentiment.