May 21 2024: Oil prices continued to decline in Asian trade on Tuesday, as concerns grew that persistent U.S. inflation and potential higher interest rates could dampen consumer and industrial demand.
Brent crude futures dropped by 57 cents, or 0.68%, to $83.14 a barrel by 0613 GMT. Similarly, U.S. West Texas Intermediate (WTI) crude slipped by 58 cents, or 0.73%, to $79.22 a barrel.
Fed Officials’ Comments Fuel Demand Concerns
Both oil benchmarks experienced less than a 1% decline on Monday after comments from U.S. Federal Reserve officials suggested a cautious approach towards interest rate cuts. Analysts, such as Toshitaka Tazawa from Fujitomi Securities, noted that fears of weaker demand led to selling as the prospect of a Fed rate cut became more distant.
Fed Vice Chair Philip Jefferson mentioned it was too early to determine if the inflation slowdown is “long-lasting,” while Vice Chair Michael Barr stated that restrictive policy needs more time. Additionally, Atlanta Fed President Raphael Bostic emphasized that it will “take a while” for the central bank to be confident that the slowdown in price growth is sustainable.
Market Impact of Higher Interest Rates
The Fed officials’ comments indicated that interest rates might remain higher for longer than the market expects. This scenario affects the oil market as higher borrowing costs could stifle economic growth and reduce the demand for crude.
Political Uncertainty in Oil-Producing Countries
Despite recent political uncertainties in major oil-producing countries, the market showed little reaction. Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, was killed in a helicopter crash on Sunday. Separately, Saudi Arabia’s Crown Prince Mohammed Bin Salman postponed a trip to Japan due to his father’s health issues.
IG market strategist Yeap Jun Rong mentioned in an email to Reuters that while there was initial movement due to the uncertainty in Iran, prices stabilized as investors assumed a status quo in policies and no immediate regional conflict.
Focus on OPEC+ Supply Decisions
Investors are closely watching the Organization of the Petroleum Exporting Countries and its affiliates, collectively known as OPEC+. They are set to meet on June 1 to decide on output policy, including whether to extend some members’ 2.2 million barrels per day of voluntary cuts.
Yeap from IG noted that prices are waiting for a catalyst to drive a breakout from the current range, with attention on geopolitical developments and oil inventory data this week. Sources previously told Reuters that OPEC+ might extend some voluntary output cuts if demand does not improve.
Overall, the oil market remains cautious as it navigates the implications of Fed policies and potential geopolitical shifts.
