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Business News/ Markets / Commodities/  Oil prices drop over $1 after US inflation, Fed outlook hurts consumer demand; Brent at $82/bbl
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Oil prices drop over $1 after US inflation, Fed outlook hurts consumer demand; Brent at $82/bbl

Brent crude futures last fell by $1.21, or 1.45 per cent, to $82.50 per barrel. Higher borrowing costs tie up funds in a blow to the economic growth and demand for crude oil.

Brent crude futures last fell by $1.21, or 1.45 per cent, to $82.50 per barrel (Image: Pixabay)Premium
Brent crude futures last fell by $1.21, or 1.45 per cent, to $82.50 per barrel (Image: Pixabay)

International crude oil prices declined by more than one per cent on Tuesday, May 21, with lingering US inflation poised to keep interest rates higher for longer, potentially dampening consumer demand. Higher borrowing costs tie up funds in a blow to the economic growth and demand for crude oil and pressures consumer demand at the pump.

Brent crude futures fell by $1.21, or 1.45 per cent, to $82.50 per barrel. US West Texas Intermediate crude (WTI) futures for June, slipped by $1.26, or 1.58 per cent, to $78.54. The more active July contract lost $1.09, or 1.37 per cent, to $78.21. The structure of the Brent contract is weakening in an indication of a softer market and strong supply.

Also Read: India's Russian oil imports rise to nine-month high in April as shipments resume from Sovcomflot

The front-month Brent contract's premium to the second-month contract narrowed to 10 cents, its weakest since January 2024, according to news agency Reuters. On the domestic front, crude oil futures last traded 0.02 per cent higher at 6,569 per barrel on the multi-commodity exchange (MCX). 

Why is crude oil under pressure?

-Analysts said that the market is very focused on gasoline demand in the US because there are signs that consumers are cutting back due to inflation. Unless that turns around, the market suggests things could be a little bleak.

-Despite the run up to this weekend's Memorial Day holiday, which kicks off the US peak summer driving season, the retail gasoline prices fell for the fourth consecutive week to $3.58 per gallon on Monday, the Energy Information Administration (EIA) said in its gasoline and diesel fuel update.

-However, in a bid to ensure sufficient supply flows to the northeast, the US will sell the nearly one million barrels of gasoline in a reserve in northeastern states, with bids due on May 28, the Department of Energy said on Tuesday.

-Investors are awaiting minutes from the US Federal Reserve's last policy meeting due on Wednesday, as well as weekly US oil inventory data. Analysts say nothing in the market right now that is pushing prices higher. 

-Meanwhile, Fed officials' comments pointed to interest rates staying higher for longer than markets previously expected. Two Federal Reserve policymakers said it was prudent for the US central bank to wait several more months to ensure that inflation is back on a path to the two per cent target before commencing interest rate cuts.

-"In the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy," said Fed Governor Christopher Waller.

-On the supply side, a fading geopolitical risk premium from the ongoing war in Gaza failed to provide much support. The market also appeared largely unaffected by the death of Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, in a helicopter crash on Sunday.

-The market has taken away some of the risk premium because it seems even though Israel is continuing in Rafah, this is not impacting supply or demand. Crude prices may not change majorly over Iranian oil policy after the president’s death.

-Investors are focusing on supply from the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+). They are scheduled to meet on June 1 to set output policy, including whether to extend some members' voluntary supply cuts of 2.2 million barrels per day. OPEC could extend some voluntary cuts if demand fails to pick up.

Also Read: Oil records weekly gain after bullish US, China macro data raises demand; Brent nears $84/bbl, WTI up 2% in 5 days

Where are prices headed?

Analysts said that WTI crude oil futures came under pressure as investors weighed weak demand prospects against a lack of supply disruptions. Hawkish comments from Fed officials improved the conviction that rates might stay higher for longer and the quantum of cuts might be less than market anticipations, which might weigh on the oil demand going forward, according to Kaynat Chainwala – Senior Manager, Commodities Research – Kotak Securities.

At the same time, recent events such as Ukraine's attacks on Russian refineries and a Houthi missile strike in the Red Sea continued to pose risks to global supply. Fed officials' comments led to profit-taking from higher levels and a rebound in the dollar index. 

‘’Despite this, geopolitical tensions may continue to support prices at lower levels. We expect crude oil prices to remain volatile. Crude oil has support at $78.10–77.50 and resistance at $79.20–79.90. In INR, crude oil has support at 6,510–6,440, while resistance is at 6,650–6,730,'' said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.

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ABOUT THE AUTHOR
Nikita Prasad
Nikita covers business news and has been producing news on digital platforms since 2018. She writes on economy, policy, markets, commodities, industry. Her core areas of interests include infrastructure, energy, oil and gas, railways, and transport/mobility. She has worked for business news channels like Moneycontrol, NDTV Profit, and Financial Express in the past. If you have story ideas/pitches/reports or quotes/views to share, reach her at nikita.prasad@htdigital.in.
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Published: 21 May 2024, 11:10 PM IST
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