U.S. Crude Remains Below $100 Ahead of the Fed Meeting

In volatile trading before the Federal Reserve's decision on interest rates this week, oil prices increased, but the most actively traded futures in U.S. crude and global benchmark Brent remained below or around the crucial $100 per barrel level owing to conflicting demand projections.

Craig Erlam, an analyst at the online trading platform OANDA, said, "Oil traders have their eyes on many of the same events this week in order to better comprehend the economic threat facing the United States and other countries across the world." Recession is the greatest downside risk for oil prices, and the sole thing keeping them below $100 in the foreseeable future.

West Texas Intermediate, or WTI, oil for September delivery on the New York Mercantile Exchange rose $2, or 2.1%, to $96.70 a barrel. Last week, WTI fell around 3 percent, extending its three-week fall to approximately 13 percent. In the previous week, it dropped to $90.58, its lowest level since February 25.

Brent for October delivery traded in London increased $1.81, or 1.8%, to $100.19, extending the previous week's rise of 2.2%. Prior to that, the worldwide benchmark for crude oil had fallen for five consecutive weeks, losing around 17 percent. At the same time as WTI, Brent struck a five-month low of $95.42 a barrel.

As the Federal Reserve prepares to execute its fourth rate hike of the year, oil and other risk assets may be volatile this week. Wednesday, after the Federal Open Market Committee's decision on interest rates, Jerome Powell, chairman of the central bank, will conduct a news conference. This press conference will be analyzed by traders for economic indications.

In July, there will be another 75-basis point hike, just as there was in June, according to over 80 percent of analysts. If so, rates would reach a range of 2.25 to 2.50 percent by the end of this month, up from a range of 0 to 0.25 percent before February's increases.

Fed policymakers predict rates to reach a maximum of 3.5% or maybe 4% by the end of the year, with three more rate decisions to be made this year.

However, traders in the money market are also pricing in rate cuts by 2023 if the adverse economic implications of Fed rate hikes prove to be too severe. This followed a week in which wagers hit 70 percent, culminating in a record 100 basis point rise in July.

The fact that the market is even contemplating a fall in interest rates by next year suggests to experts that the likelihood of a Fed-induced recession happening between now and then is rather high.

In the first quarter, the U.S. economy contracted by 1.6%, and a negative second quarter is all that is necessary to formally declare a recession. On Thursday, a day following the Fed's rate decision, the first GDP data for the second quarter will be revealed.

"A speedier pace of Fed tightening and poor earnings reports from the U.S. this week might drive fresh oil market weakness," warned OANDA's Erlam, although he voiced caution over the size of the downside risk. Even as the probability of a recession grows, the tightness of the oil market cannot be overlooked. A sustained breach below $90 remains difficult to achieve, and if it does, it will be a double-edged sword."

Phil Flynn, a trader at Price Futures Group in Chicago, also predicted that if WTI went below $90, oil bulls would rush to purchase dips.

Flynn said, "Global oil inventories are below normal, and if demand destruction is less than predicted, we might see a large spike in oil prices." Increased production is stimulated by rising prices, but this will take time.