Oil Drops 2% on Powell’s Comments and Hopes for Venezuela Supply, Reports Reuters

By Stephanie Kelly

NEW YORK (Reuters) – Oil prices experienced a 2% drop on Tuesday after reaching seven-week highs, as reports emerged suggesting that the United States might loosen some restrictions on Venezuela’s government, sparking optimism for increased market supplies.

The decline in prices was also influenced by comments from Federal Reserve Chairman Jerome Powell, who cautioned that the economy might face challenges from efforts to control inflation.

For the first time since May 2020, the Brent international benchmark settled below the U.S. West Texas Intermediate crude benchmark. Andrew Lipow, president of Lipow Oil Associates in Houston, noted that refiners around the globe have been actively seeking alternative energy sources following Russia’s invasion of Ukraine. Additionally, dwindling U.S. reserves have contributed to increasing prices for domestically produced crude oil.

Brent crude fell by $2.31, or 2%, settling at $111.93 a barrel, while West Texas Intermediate crude declined by $1.80, or 1.6%, to close at $112.40 a barrel.

Powell indicated that some economic pain might be necessary to effectively reduce inflation, stating that the U.S. central bank would continue to refine its monetary policy until there are clear signs of inflation decreasing. "Some of those comments tempered buying enthusiasm on the oil side," remarked Phil Flynn, an analyst at Price Futures Group.

According to sources, the Biden administration is expected to authorize Chevron to negotiate with Venezuelan President Nicolas Maduro’s government as early as Tuesday. However, no final decision has been made regarding the renewal of Chevron’s limited operational license in Venezuela.

Oil prices have been generally rising due to reduced Russian supply prompted by bans from multiple countries, along with an economic downturn resulting from broad sanctions imposed by the U.S. and its allies. Russia’s oil production saw a 9% decline in April, and the nation—a part of the OPEC+ group—has been producing significantly below the levels required under an agreement to gradually ease the record output cuts established during the pandemic’s worst phase in 2020.

This month, non-Russian oil deliveries to the Polish port of Gdansk reached their highest levels in at least seven years, as refiners in eastern Germany and Poland transitioned to alternative sources.

"This is fundamentally a supply-side issue," explained Fawad Razaqzada, an analyst at City Index. "Unless OPEC and its allies increase production promptly, it’s hard to envision a significant reduction in prices."

Additionally, EU foreign ministers were unsuccessful in pressuring Hungary to lift its veto on a proposed oil embargo against Russia. However, some diplomats are now looking toward a summit scheduled for May 30-31 as a potential opportunity for consensus regarding a phased ban on Russian oil.

Furthermore, reports from market sources indicate that U.S. oil and gasoline stocks fell last week, with official government data expected to be released soon.