Oil prices declined on Thursday, weighed down by ongoing concerns over the prospect of the U.S. Federal Reserve keeping interest rates elevated for an extended period, as well as an unexpected buildup in inventories that raised worries about less tight market conditions.
Traders had steadily priced out a risk premium from oil prices this week after the death of Iran’s president appeared to have had little immediate impact on geopolitical dynamics in the Middle East.
Cooling optimism surrounding stimulus measures in China, a major oil importer, also contributed to some weakness in the markets, as traders waited to see how the country would implement its recently unveiled stimulus initiatives.
Brent crude oil futures expiring in July declined 0.7 percent to $81.35 per barrel, while West Texas Intermediate (WTI) crude futures fell 0.8 percent to $76.98 per barrel by 21:02 ET (01:02 GMT).
Prospect of prolonged high U.S. rates fuels concerns
The minutes from the Fed’s late-April meeting showed waning confidence among policymakers that inflation was easing as expected, potentially necessitating the maintenance of high interest rates for longer. Several Fed officials have also recently warned of such a scenario, and indicated that any potential plans for rate cuts would largely depend on confidence in inflation returning to the central bank’s 2 percent annual target.
The prospect of prolonged high U.S. interest rates also fueled persistent concerns that global economic activity will cool substantially in 2024, which would pressure oil demand.
Official data shows unexpected inventory build
These concerns were further exacerbated by official data on Wednesday showing an unexpected build in U.S. oil inventories in the week to May 17. Distillate inventories also grew, while gasoline inventories saw a smaller-than-expected drawdown. This reading set a dour tone ahead of the Memorial Day weekend holiday, which typically marks the beginning of the travel-heavy summer season and is expected to boost demand.
However, persistent inflation, cooling retail spending, and high interest rates are expected to potentially dampen U.S. fuel demand this year.
Supply-side developments ahead
On the supply side, the market is awaiting a meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) in early June, where the cartel could potentially extend its current production cuts.
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