Oil Prices Decline Amid Concerns Over US Inflation and Interest Rates, Reports Reuters

Oil Prices Experience Slight Decline Amid Inflation Concerns

Oil prices decreased by less than 1% on Monday as officials from the U.S. Federal Reserve indicated they were looking for more evidence of declining inflation before considering any cuts to interest rates. Two key Fed representatives stated that they are not ready to conclude that inflation is sustainably trending toward the central bank’s 2% target. This statement followed the release of data last week showing a positive easing in consumer price pressures for April.

Potential reductions in interest rates could lower borrowing costs for both consumers and businesses, which might stimulate economic growth and increase oil demand. In trading, Brent crude futures dropped 27 cents, or 0.3%, to settle at $83.71 a barrel, while U.S. West Texas Intermediate (WTI) crude also fell by 26 cents, or 0.3%, closing at $79.80.

This situation has resulted in the premium of Brent over WTI remaining near its lowest level since March for three consecutive days. A reduced premium can make it less profitable for energy companies to export crude by sending it to the U.S., resulting in more oil being left in the country that must either be consumed or stored. Additionally, the premium of Brent’s front-month over the second month, referred to as backwardation in industry terms, fell to its lowest since January.

In a backwardation market, energy companies are incentivized to withdraw oil from storage for immediate use rather than wait for potentially lower future prices. Conversely, if the market were to shift to contango, where future contracts are valued higher than the front-month, companies might opt to store oil, leading to potential price declines.

Despite political uncertainties in major oil-producing nations due to the recent death of Iran’s president and a postponed trip to Japan by Saudi Arabia’s crown prince owing to his father’s health, the oil market remained relatively stable. Analysts indicated that Iranian oil policy is unlikely to change as Supreme Leader Ayatollah Ali Khamenei maintains ultimate control over state matters. Furthermore, in Saudi Arabia, market participants are already accustomed to Crown Prince Mohammed Bin Salman’s leadership in the energy sector, suggesting continuity in the country’s strategy.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known collectively as OPEC+, are scheduled to convene on June 1. Analysts noted that the market seems increasingly desensitized to geopolitical events, likely due to the substantial spare capacity within OPEC.

Recent data indicated that Saudi Arabia’s oil exports increased for a second consecutive month in March, reaching a nine-month high. Additionally, Russia remained China’s top oil supplier in April for the twelfth month, with shipments rising by 30% year-on-year as refineries benefited from discounted oil. In contrast, supplies from Saudi Arabia declined by a quarter due to rising prices.

Russian President Vladimir Putin announced an 8% increase in gas output within the first four months of the year, while oil production fell by 1.8%, attributed primarily to ongoing OPEC+ production cuts. Following a recent drone attack that damaged a Russian refinery, the country announced a suspension of a ban on gasoline exports until June 30, though it plans to reinstate the ban from July 1 to August 31.