Oil Falls Over $1 as Fed Rate Outlook Raises Demand Concerns

Oil prices declined by over $1 on Tuesday, compounding losses caused by the possibility that persistent U.S. inflation will prolong interest rate hikes, which would have a negative impact on industrial and consumer demand

At 12:10 GMT, Brent crude futures decreased by $1.54, or 1.8%, to $82.17 per barrel. June futures on U.S. West Texas Intermediate crude (WTI), which expires on Tuesday, declined to $78.31, 1.8%, or 1.49 cents.

To $77.75, the more actively traded July contract declined 1.9%, or $1.55.

On Monday, both benchmarks declined by approximately 1%, according to statements by U.S. Federal Reserve officials that they were awaiting additional indications of decelerating inflation before contemplating reductions in interest rates.

As the likelihood of a Federal Reserve rate cut diminished, concerns regarding diminished demand prompted selling, according to analyst Toshitaka Tazawa of Fujitomi Securities.

Vice Chair Michael Barr of the Federal Reserve stated that more time is required to determine whether the inflation decline is permanent. In contrast, Vice Chair Philip Jefferson of the Fed indicated it is too early to tell.

According to President Raphael Bostic, the Atlanta branch of the Federal Reserve Bank of Atlanta will “take a while” to ensure that a decline in price growth is sustainable.

Fed officials’ remarks suggested that interest rates might remain elevated for a more extended period than anticipated by the markets.

This has ramifications for the oil market, as increased financing expenses impede the flow of capital, which harms both crude oil demand and economic expansion.

Political instability in two key oil-producing nations has little impact on the market.

On Sunday, a helicopter accident claimed the life of Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei. In a distinct development, Crown Prince Mohammed Bin Salman of Saudi Arabia postponed a visit to Japan due to his father, the king,’s health.

Vandana Hari, founder of Vanda Insights, stated, “The (oil) complex continues to lack significant bullish or bearish influences to push prices out of the current narrow band, which has become entrenched since the beginning of May.”

In the interim, the Brent contract exhibits a deteriorating structure, suggesting a faltering market and an ample supply.

The premium of the first-month Brent contract over the second-month contract decreased to 10 cents, its lowest level since January.

Supply from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively referred to as OPEC+, is the focus of investor attention. They are expected to convene on June 1 to determine output policy, including whether to extend the voluntary supply limits of 2.2 million barrels per day imposed on some members.