Oil prices slip for third day as markets see “higher for longer” US interest rates

Oil prices declined on Wednesday and appeared to be on track for a three-day losing streak amid expectations that the Federal Reserve might keep US interest rates “higher for longer” due to persistent inflation, potentially impacting fuel consumption in the world's largest market.

The market also slipped as US crude oil and gasoline inventories rose last week, according to American Petroleum Institute (API) figures cited by market sources on Tuesday. Analysts previously expected inventories to decline.

As of 1200 GMT on Wednesday, the continuous futures contract for Brent crude on the ICE Futures Europe Exchange fell 67 cents, or 0.82%, to $82.20 a barrel. A similar contract for U.S. West Texas Intermediate crude (WTI) decreased 66 cents, or 0.84%, to $78.00 a barrel. Both benchmarks had dropped by more than 1% earlier in the session.

In a comment to the Reuters news agency, Tamas Varga of oil broker PVM said:  

"The view on the fundamental outlook remains grim. The timing of a Fed rate cut is ambivalent at best".

Oil prices had settled about 1% lower on Tuesday.

Physical crude markets weaken as concerns ease over tight prompt supply

The physical crude market has been weakening, and the premium of Brent's first-month contract over the second, known as backwardation, is nearing its lowest point since January, signaling easing concerns over tight prompt supply.

Federal Reserve policymakers indicated on Tuesday that the US central bank should wait several more months to confirm that inflation is on track to meet its 2% target before considering interest rate cuts.

Higher borrowing costs can slow economic growth and reduce oil demand.

Investors are now awaiting minutes from the Fed's last policy meeting and the latest official U.S. oil inventory figures from the Energy Information Administration (EIA), due later on Wednesday, following the API data.

In a report cited by Reuters, analysts at Melbourne-based ANZ Bank wrote:

"The Federal Open Market Committee (FOMC) minutes will be scrutinised for the Fed's assessment of bumpy Q1 inflation and clues on the timing and extent of potential interest rate cuts in 2024”.

As per data cited by MarketWatch, analysts surveyed by S&P Global Commodity Insights, on average, look for crude inventories to show a fall of 2.15 million barrels, with gasoline stocks down 480,000 barrels and distillates unchanged.

UK inflation in April fell less than expected, with a key core measure barely decreasing, leading investors to pull back on bets for an interest rate cut by the Bank of England next month.

Brent oil price still up 7% despite recent fall, supported by OPEC+ cuts

Front-month futures of global oil benchmark Brent settled below $83 a barrel on Tuesday, having traded within a narrow $5 range this month.

Despite this, Brent futures remain about 7% higher this year, bolstered by OPEC+ production cuts. Oil prices have eased since mid-April, however, with crude price volatility dropping to its lowest level in five years.  

Traders are now focusing on the OPEC+ meeting in early June, where an extension of existing oil production cuts is anticipated. Meanwhile, geopolitical tensions persist with ongoing drone strikes on Russian oil refineries and a recent Houthi attack on a tanker in the Red Sea over the weekend.

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