Oil Prices Decline Amidst Rising US Inflation; OPEC Sticks to Forecasts

Oil prices experienced a decline on Tuesday as persistent inflationary pressures dampened expectations for interest rate cuts, while attention shifted toward new U.S. supply data.

By 14:30 ET, crude oil prices fell by 1.1%, settling at $82.42 per barrel, while benchmark futures dropped 1.4% to $78.02 per barrel.

### PPI Exceeds Expectations, Impacting Rate Cut Prospects

U.S. producer prices rose by 0.5% in April, surpassing expectations and indicating ongoing inflationary pressures early in the second quarter. This increase was higher than the 0.3% that economists had predicted and was a rebound from a revised contraction of 0.1% in March.

Morgan Stanley noted that the PPI data remains above the threshold that would indicate a positive trend in inflation. Over the past year, the producer price index for final demand rose by 2.2%, which was anticipated, marking the largest increase since a 2.3% rise in April 2023. The previous month’s figure was also revised downward to 1.8%.

### China Announces Fiscal Stimulus Measures

On Monday, sentiment was buoyed after China’s finance ministry announced plans to raise 1 trillion yuan (approximately $138 billion) through a bond issuance to stimulate its faltering economy. This issuance will focus on special government bonds with maturities ranging from 20 to 50 years.

Chinese officials indicated that the bonds would target key sectors, including infrastructure, to support economic growth. The issuance was anticipated, but its confirmation still fostered optimism about improving economic conditions in the world’s largest oil importer. This followed mixed inflation data over the weekend, which raised concerns about the sustainability of China’s economic recovery, particularly as consumer inflation rose while producer inflation declined for the 19th consecutive month.

### Canadian Wildfires Pose Supply Disruption Risks

In addition, severe wildfires in Western Canada have raised concerns about potential disruptions to oil and gas supplies, particularly near a major oil hub. Residents of Fort McMurray, Alberta, were placed on alert due to two “extreme” wildfires in the region, close to Canada’s largest oil-sands operations. The city had previously suffered significant damage from wildfires in 2016.

Recent rain has alleviated some of the immediate threats from the fires, but residents remain vigilant. Escalating wildfire activity could lead to supply interruptions in Canada’s vital oil and gas sector, which is integral to North American crude markets. Canada faced its most severe wildfire season in 2023, with production potentially disrupted by as much as 300,000 barrels per day. The 2016 wildfires significantly impacted production, taking about 1 million barrels per day offline.

### OPEC Maintains Demand Forecast Ahead of Upcoming Meeting

In its monthly report, OPEC upheld its projections for global oil demand, anticipating an increase of 2.25 million barrels per day in 2024 and 1.85 million barrels per day in 2025. The decision comes as the group noted expectations for stronger global economic growth this year.

Iraq’s oil minister, Hayyan Abdul Ghani, indicated over the weekend that Iraq would adhere to the voluntary output reductions agreed upon by OPEC+ in the forthcoming meeting scheduled for June 1. This statement marked a shift from earlier comments suggesting that Iraq had already achieved sufficient reductions and would not consent to further cuts.

Analysts at ING suggested that the current uncertainty around OPEC+ members’ actions regarding additional supply cuts has contributed to the lack of clear price direction in recent times.