Oil prices are falling as fears of a rate hike in the US, and weak China data offset supply cuts

TOKYO (Reuters) – Oil prices fell on Monday amid concerns about the economic impact of a potential U.S. Federal Reserve rate hike and weak Chinese manufacturing data was enough to outpace support from new OPEC+ supply cuts that took effect this month.

Brent crude futures for July delivery fell 56 cents, or 0.7 percent, to $79.77 a barrel at 0547 GMT, while US West Texas Intermediate crude lost 63 cents, down 0.8 percent, to trade at $76.15.

US consumer spending was flat in March as an increase in expenditures on services was offset by a decline in goods, but continued strength in underlying inflation pressures could lead to the Fed raising interest rates again.

“The prospect of an interest rate hike that the Fed will announce this week is expected to increase price volatility in the near term,” said Baden Moore, Head of Commodities and Carbon Strategy at the National Australia Bank (NAB).

The Fed is expected to raise interest rates by another 25 basis points this week. The US central bank has raised interest rates by 475 basis points since March last year from near zero to the current range of 4.75%-5.00%.

Next week, the Reserve Bank of Australia is widely expected to extend its rate hike pause on Tuesday, and may surprise the European Central Bank with a large half-point increase on Thursday.

Meanwhile, China’s manufacturing purchasing managers’ index (PMI) fell to 49.2 from 51.9 in March, official data showed Sunday, slipping below the 50-point mark that separates expansion and contraction in activity on a monthly basis.

Factory activity in Japan, the world’s third-largest economy, contracted for the sixth straight month in April, but the manufacturing sector was set to stabilize amid a slower decline in new orders.

“Investors remain cautious amid mixed economic signals. Brent crude has been tracking the broader markets in recent sessions, with a slew of economic data creating more uncertainty about the outlook,” ANZ Research said in a note to clients.

As of Monday, oil production cuts of about 1.16 million barrels per day came into effect — a surprise move last month by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, in a group known as OPEC+.

“After the recent OPEC supply cuts, which affected from May, we believe the oil market will be in deficit for the remainder of the second quarter, which – combined with a seasonal increase in OECD demand as well as an increase in Chinese demand year on year – he said. NAB’s Moore: “We expect it to drive prices higher.”

Reporting by Katya Golubkova. Editing by Kenneth Maxwell

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