Oil prices dropped sharply Tuesday, following Monday’s surge that sent shock waves around the world.
US oil futures dropped 3.9% to $60.43 per barrel, following a Reuters report that Saudi Arabian oil production would return to normal within two to three weeks. Investors took that as a positive sign about the impact of the weekend’s attacks on global oil supply.
This puts American oil prices on track for the worst day since the beginning of August, according to Refinitiv.
Brent crude, the international benchmark, is down 4.8% at $65.70 a barrel. On Monday, oil prices shot up more than 14%.
US stocks were mixed in early trading. The Dow was down by less than 30 points, or 0.1%. The S&P 500 was up 0.1% and the Nasdaq Composite hovered in barely negative territory.
Elsewhere in the world, stocks finished also mostly in the red.
If oil prices fail to capture investors’ attention on Tuesday, focus may turn to the Federal Reserve, which is beginning a two-day monetary policy meeting that will culminate in its interest rate update on Wednesday.
Expectations for a quarter-percentage-point rate cut have dropped to only 45%, according to the CME’s FedWatch tool. That’s down from 92% last week, when the majority still expected rates to be slashed.
A half percentage point cut is no longer priced in at all.
“There have been a variety of explanations for the change in expectations, be it stronger data last week, improved risk appetite, trade war optimism and even higher inflation potential following the oil price spike,” said Craig Erlam, senior market analyst at Oanda.
“Whatever the reason, it would be an interesting move from the Fed to hold at the meeting and one that would almost certainly draw the ire of President Trump, although they must be used to that by now.”
In the world of interest rates, a sudden spike in the overnight lending rate is also on market participants’ minds on Tuesday.
The repo rate, which is the borrowing rate banks charge each other to buy Treasuries, for example, jumped overnight, indicating low market liquidity. The New York Fed said it would inject $75 billion to help matters, but ended up adding just $53 billion. As the market for US Treasuries is one of the most liquid markets in the world, the repo spike has causing some concern among investors.
In US economic data, industrial production was stronger than expected in August. While the US manufacturing sector shrank for the first time in August, Tuesday’s data point suggests that the situation might be more complex than first thought.
Meanwhile, the National Association of Home Builders housing index for September climbed more than expected, to 68 from 66, while August’s number was revised higher to 67 from 66. Mortgage rates have been dropping to multi-year lows this summer in the United States, as longer-dated Treasury yields keep falling. This in turn has spurred activity in the housing sector.
Whether home building moved along in lock step will become clear Wednesday with the release of August housing starts data, which is expected to have risen from July. Building activity has been struggling with a shortage of construction workers in the tight American labor market and more expensive materials in the face of trade tariffs.