Oil extends slide ahead of FOMC decision, API reports large drawdown

Oil prices continued their sharp decline on Tuesday, falling another $4 as traders positioned ahead of the Federal Reserve's policy decision. The American Petroleum Institute reported a large drawdown in crude inventories after the bell, a factor that would typically support prices but was overshadowed by expectations of resumed flows from a pending deal expected to be signed on Friday.

The selloff in oil has been notable for its speed, with crude falling over 4.5% on the day. However, the cross-asset reaction has been surprisingly muted. US Treasury yields edged down only 2-3 basis points, and the foreign exchange market showed little movement. Even energy equities were relatively calm, with the XLE ETF slipping just 0.3%. This suggests that the oil move may be driven by position squaring or capitulation by longs rather than a broad shift in risk sentiment. For currency traders, the lack of a clear risk-off signal means that traditional havens like the yen and Swiss franc saw limited demand, while commodity currencies such as the Canadian dollar and Norwegian krone also failed to react sharply. NowPrice's real-time fx quotes show the dollar index holding steady, reflecting the absence of a strong directional bias.

Looking ahead, the focus shifts to the Federal Reserve's interest rate decision and the accompanying economic projections. Any hawkish surprise could strengthen the dollar and further pressure oil, while a dovish tone might provide some relief. Additionally, the weekly EIA inventory report on Wednesday will offer a more comprehensive look at supply-demand dynamics. Traders should also monitor developments around the oil deal expected to be finalized on Friday, as its outcome will likely determine the near-term trajectory for crude prices. The combination of central bank policy and supply-side factors will keep volatility elevated across asset classes.