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Oil Prices Climb On OPEC+ Decision And Declining Dollar

After slipping earlier this week on doubts about the Fed’s rate hikes, crude oil prices reversed their losses on Wednesday, following an OPEC+ meeting that resulted in no change to production policy and a weaker U.S. currency.

Doubts about the Fed’s next move ended on Wednesday when the U.S. central bank announced yet another, but smaller, rate hike, at a quarter of a percentage point, largely in line with expectations and hopes that it is nearing the moment when it will end rate hikes altogether.

The Fed itself, however, dismissed such hopes, saying it will continue hiking rates until it gets inflation under control, and this affected the greenback, strengthening oil prices.

"Those hawkish reaffirmations from the Fed were met with rising doubts from the markets, which saw a dovish takeaway from Jerome Powell's acknowledgment of progress in the 'disinflationary process' and that he is not worried about loosening financial conditions," IG analyst YeapJun Rong said in a note cited by Reuters.

OPEC+ meanwhile met in Vienna to reaffirm its commitment to current production arrangements, which involve reduced quotas until the end of the year. Most OPEC members continue to produce below quota, however. In December, the 10 OPEC members bound by the OPEC+ pact underproduced by more than 800,000 barrels daily.

This means global supply of crude oil will remain constrained, and with China’s return to normal economic activity after the lockdowns expected to lead to a demand jump, the upside potential for oil has increased.

On the flip side, the latest manufacturing data out of the United States pointed to a third consecutive monthly contraction, suggesting the world’s largest economy is not out of the woods, with potential negative implications for oil demand growth. Factory activity also contracted in Europe and Asia last month.

"It looks like we will continue to see headline contraction in the manufacturing sector for several more months, at a minimum," Jefferies analysts said in a note this week. This suggests the potential for higher oil prices remains constrained by demand uncertainties as central banks continue with their efforts to tame inflation.

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By Irina Slav for Oilprice.com

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