Oil prices drop 2% on rate hikes, economy worries linger

TOKYO Reuters - Oil prices fell 2% in early trade, extending losses from the previous day, as investors worried that aggressive U.S. interest rate hikes could cause a recession and dent fuel demand.

U.S. West Texas Intermediate WTI crude futures fell $2.39, or 2.3%, to $103.80 a barrel by 0031 GMT. Brent crude futures dropped $2.24, or 2.0%, to $109.50 a barrel.

Both benchmarks fell by around 3% on Wednesday to hit their lowest level since mid-May.

Investors are worried about central banks possibly causing the world economy to go into a recession as they try to curb inflation with interest rate increases.

Oil markets were under pressure because investors were worried that U.S. rate hikes would stall an economic recovery and dampen fuel demand, said Kazuhiko Saito, chief analyst at Fujitomi Securities Co Ltd.

He said that the WTI could fall below $100 a barrel before the July 4 holiday in the United States, which is why the US and European hedge funds have been selling off their positions ahead of the end of the second quarter.

The Federal Reserve is not trying to engineer a recession to stop inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, according to Jerome Powell, U.S. central bank chief.

U.S. President Joe Biden called for a three-month suspension of the federal gasoline tax to help combat record pump prices and provide temporary relief for American families this summer.

The news temporarily boosted oil product prices, but later it was later seen that even if the gasoline tax was suspended retail prices would remain high, making it difficult to stimulate demand, Fujitomi's Saito said.

The U.S. Energy Information Administration said that the weekly oil data will be delayed due to system issues until at least next week.