Oil drops amid Fed concern over global economy

Oil prices fell on Friday after the U.S. central bank warned on the health of the global economy and bearish signs persisted that the world's biggest crude producers would keep pumping at high levels.

The Federal Reserve decided against raising interest rates from historic lows on Thursday, saying uncertainty about global economic growth had forced its hand.

The bearish sentiment sent European stock markets sharply lower on Friday, with London's FTSE 100 and Frankfurt's Dax down 1.4-2.8%.

The oil market had mixed reactions to the Fed decision, with concerns about economic weakness sending commodities lower, but a fall in the U.S. currency also meant buying dollar-traded crude became cheaper.

"The perception of 'ZIRP (Zero Interest Rate Policy) forever' should provide some underlying support to the commodity complex," said Olivier Jakob, a strategist at Petromatrix, a Swiss-based consultancy.

Brent crude was down 65 cents at $48.43 a barrel at 1230 GMT, after touching an intraday high of $49.75. U.S. West Texas Intermediate (WTI) crude futures were trading down $1.30, or 2.8%, at $45.60 a barrel.

Brent was set to make its first weekly gain in three weeks, hinting at a turn in momentum for a commodity that has declined nearly 30% since spring.

Kuwait, a key member of the Organization of the Petroleum Exporting Countries (OPEC), said on Thursday the oil market would balance itself but that this would take time, indicating support for the group's policy of defending market share despite falling prices.

Other sources at OPEC backed this view, saying they expected oil prices to rise by no more than $5 a barrel per year to reach $80 by 2020, with a slowing in rival non-OPEC production growth not enough to absorb the current oil glut.

Iran's deputy oil minister Rokneddin Javadi was quoted as saying the country would unveil new oil contracts in the coming weeks, earlier than previously expected.

The prospect of sanctions-free Iran adding more barrels to an already oversupplied market is fuelling bearish momentum. Javadi also reiterated Iran's plans to regain its oil production share once Western sanctions are removed.

Russia acknowledged for the first time on Friday it would cut production if oil prices fall below $40 a barrel, floating the possibility that one of the biggest oil producers may resort to proactive measures to prop up prices.

About the Author

Karolin Schaps, Reuters