Effect of Fed Fund Rate Hikes on Oil
<< Interest Rates and Production >>
In a rising rate environment, companies have to pay more to finance their operations because debt is not as cheap. Oil prices are probably dropping at the same time, so each firm is receiving less for its product.
<< Finding Equilibrium >>
– If oil profits drop, investors are less likely to buy stock in these companies. Some firms will have to close down some of their wells and lay off workers.
– An increase in the fed funds rate makes it more expensive to borrow, makes oil cheaper and ends up hurting the bottom line for many oil producers.
The subsequent drop in production, however, eventually puts upward pressure on prices until the market finds a relative equilibrium.