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Oil Slides on API, Fed Rhetoric

Stavros Tousios | Wednesday 22 May 2024

WTI crude oil (CL) prices fell for a third consecutive session on Tuesday, May 21, amid concerns over high US inventories and interest rates as the market expects the Fed to keep interest rates higher for longer to tackle inflation. Brent crude oil (EB) fell 1% to settle at $82.88 a barrel while WTI crude slipped 0.7% to $79.26.

Crude oil prices fell despite ongoing geopolitical tensions and ahead of the OPEC+ meeting on June 1. While there were more Ukrainian drone attacks on Russian refineries and a Houthi strike on a tanker in the Red Sea, the market shrugged off the heightening uncertainty in light of the recent death of Iran's President in a helicopter crash, suggesting investors remain focused on potential supply changes.

An illustration of oil price charts

API Oil Inventory Build Surprises Analysts

According to data from the American Petroleum Institute (API), US oil inventories increased by 2.48 million barrels for the week ending May 10 after increasing by 3.104 million barrels the week prior. The Department of Energy (DOE) also reported that Strategic Petroleum Reserve (SPR) inventories rose by 1 million barrels to 368.8 million barrels as of May 17. Official data from the US Energy Information Administration (EIA) is expected later today, Wednesday. 

The oil inventory data surprised some analysts who had expected a draw. Gasoline (RB) stockpiles also grew while distillate declined by 320 thousand barrels after rising by 349 thousand barrels last week. All three raised concerns over sluggish US demand.

Notably, gasoline inventories increased by 2.088 million barrels after dropping by 1.269 million barrels last week. Gasoline prices fell for the fourth consecutive week just days before the Memorial Day holiday weekend, which marks the start of the peak US driving season. Although the holiday is expected to boost fuel demand, high inflation and interest rates could limit it. 

Government Intervenes in Gas Supplies

Gasoline demand has been weak recently, down 4.5% from a year ago, but officials are concerned that high inflation is impacting consumer habits and fuel demand. Consequently, the US government has taken action to lower gasoline prices by releasing 1 million barrels from the Northeast Gasoline Supply Reserve ahead of Memorial Day weekend to ensure a competitive bidding process for retailers and terminal holders. Officials hope the action will help lower costs for consumers by providing more supply and competitive prices. 

Fed's Inflation Stance Dampens Outlook

On Tuesday, several Fed officials warned that the central bank needed more confidence that inflation was falling before cutting rates. Comments indicated that interest rates may remain higher for longer to bring CPI under control, negatively impacting the outlook for oil demand growth. Furthermore, Fed policymakers said the central bank should wait several more months before cutting interest rates. 

This came despite the latest US CPI data showing a slower-than-expected increase in April and China announcing plans to issue 1 trillion yuan this week in subsidised bonds. Both should have supported WTI prices, given that one raises expectations of an interest rate cut in September and the other raises expectations of economic growth in China.

Oil Prices Waver Despite Positive Catalysts

After bullish macroeconomic data from China and the US boosted hopes for higher demand, oil prices recorded a weekly gain for the week ending May 17. 

China's industrial output and measures to stabilise its property sector pointed to stronger demand prospects, although a drop in refined output capped gains. Recent US economic data showing softer inflation and slower hiring, as shown in Nonfarm Payrolls, also supported oil prices. 

However, prices have fallen by around 7% since April due to reduced geopolitical tensions in the Middle East and concerns about the global economy, particularly in the US. The commodity has also failed to receive a boost from recent geopolitical tensions and mounting risks to supply as traders remain sceptical. 

This week, oil prices began Monday on the downhill as traders monitored developments in Iran after the country's president and foreign minister died. Nonetheless, political uncertainties in Iran and Saudi Arabia currently do not significantly impact oil prices. As such, aside from the upcoming OPEC+ meeting in June, the market appears more focused on rising gasoline prices and signs that consumers are cutting back due to inflation. 

Outlook for WTI: OPEC+ June 1st Meeting Holds Key

Looking ahead, analysts expect OPEC's upcoming output policy decision on June 1 to result in an extension of present production cuts, given that prices remain below Saudi Arabia's target of below $90 per barrel. The coalition is currently voluntarily cutting output by 2.2 million barrels per day and could extend some voluntary production cuts if demand fails to pick up. Still, oil prices are expected to remain volatile despite uncertainty around potential supply disruptions that could push prices up in the coming weeks.

Investors might stay off the sidelines ahead of the OPEC+ meeting while Western officials brace for increased volatility and tension with Iran. Traders might also watch the key US PMI data to gauge its impact on oil prices. In fact, some analysts say oil is an outlier, and traders might be missing out on rallies for other commodities like precious metals and natural gas (NG). (Source: The Wall Street Journal)

Conclusion

Oil prices fell on Wednesday amid concerns over high US inventories and interest rates as easing Middle East tensions and signs of slowing Chinese demand have weighed on sentiment. Although some analysts argue that oil prices will remain volatile until the OPEC+ cartel meets on June 1, others point to other commodities as uncertainty remains elevated.

In the shorter term, investors and traders alike are awaiting the minutes from the Fed's April meeting for more clues on interest rates, how the dollar (DX) will fare and what the official inventory report from EIA will show later in the day.


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