May 22 2024: Oil prices fell over 1% on Wednesday, marking a third consecutive day of declines. This drop is driven by expectations that the Federal Reserve might maintain U.S. interest rates at higher levels for an extended period due to persistent inflation, potentially reducing fuel consumption in the world’s largest oil consumer.
Market Reactions to Inventory and Rate Expectations
Brent crude futures decreased by $1.03, or 1.2%, to $81.85 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $1.25, or 1.6%, to $77.41 as of 0802 GMT. The market also reacted to the rise in U.S. crude oil and gasoline inventories last week, as reported by the American Petroleum Institute (API) on Tuesday, against analyst expectations of a decline.
“The view on the fundamental outlook remains grim,” said Tamas Varga of oil broker PVM, highlighting the uncertainty surrounding the timing of a Fed rate cut. This sentiment contributed to oil prices settling about 1% lower on Tuesday.
Physical Market Weakness and Fed Concerns
The physical crude markets have shown signs of weakening, and the premium of Brent’s first-month contract over the second (known as backwardation) is close to its lowest level since January, indicating easing concerns over tight prompt supply.
Fed policymakers indicated on Tuesday that the U.S. central bank should wait several more months to ensure inflation is on track to reach its 2% target before considering interest rate cuts. Higher borrowing costs tend to slow economic growth and reduce oil demand.
Upcoming Data and Market Sentiment
Investors are keenly awaiting the minutes from the Fed’s last policy meeting. Additionally, the latest official U.S. oil inventory figures from the Energy Information Administration (EIA) are due later on Wednesday, following the API data.
“The Federal Open Market Committee (FOMC) minutes will be scrutinized for the Fed’s assessment of bumpy Q1 inflation and clues on the timing and extent of potential interest rate cuts in 2024,” ANZ analysts mentioned in a report.
Global Inflation Impact
Inflation in Britain fell by less than expected in April, with a key core measure barely dropping, as shown in figures released on Wednesday. This prompted investors to retract bets on a rate cut next month, further influencing the global economic outlook and oil market sentiment.
Overall, the oil market is under pressure from concerns over prolonged high U.S. interest rates and rising inventories, contributing to a cautious outlook on future demand.
