Crude oil prices drop 5% in 2 sessions on sharp rise in US inventories, down 10% from April peaks

Brent crude futures kicked off May with a significant drop, declining by 3% to reach a seven-week low of $83.29 per barrel. This decrease was driven by rising US stockpiles, signalling increased supply and raising concerns about weakening demand. 

Additionally, optimism surrounding a potential ceasefire in the Middle East contributed to a reduction in the commodity's risk premium. As a result, Brent crude is now nearly 10% lower than its April 2024 peak of $92.18 per barrel.

In the previous session, WTI crude futures also experienced a decline, dipping below $79 per barrel to a seven-week low with a drop of nearly 3%.  Both Brent and WTI crude ended their three-month winning streak in April, concluding the month with declines of 1.13% and 1.91%, respectively.

The Energy Information Administration released data indicating a surprising increase in US crude stockpiles, rising by 7.3 million barrels last week, contrary to the anticipated decline of 2.3 million barrels.

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Additionally, the EIA reported a notable rise in US crude oil production to 13.15 million barrels per day in February, up from 12.58 million bpd in the previous month. This marks the most significant monthly increase in almost three-and-a-half years.

In just two sessions in May, both Brent and Crude futures experienced a 5% decline. This drop follows last month's surge to the highest levels since October, which was prompted by Iran's unprecedented attack on Israel. The attack was seen as a response to a suspected Israeli strike on the Iranian Consulate in Damascus, Syria, earlier in the month.

In the subsequent sessions, prices moderated as tensions between Israel and Iran did not escalate as anticipated by the markets. Additionally, the Federal Reserve's indication in its latest meeting that interest rates will remain higher for longer also influenced prices. 

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This stance is expected to keep the dollar index elevated, thereby increasing expenses for countries reliant on crude oil imports. In April 2024, the Federal Reserve opted to maintain the fed funds rate at its current level of 5.25% – 5.5%, marking the sixth consecutive meeting without a change, as widely anticipated by the market.

The Federal Reserve signalled new worries regarding inflation while suggesting that it would probably maintain higher borrowing costs for an extended period.

Chair Jerome Powell remarked that it's improbable for the Fed to raise interest rates next, emphasising the need for convincing evidence indicating that current policy measures are not sufficiently restrictive to guide inflation back toward its 2% target.

In the Middle East, expectations grew that a ceasefire agreement between Israel and Hamas could be in sight following a renewed push led by Egypt.

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Still, Israeli Prime Minister Benjamin Netanyahu has vowed to go ahead with a long-promised assault on the southern Gaza city of Rafah despite the U.S. position and a U.N. warning that it would lead to "tragedy," as per the media reports. 

On the supply side, OPEC has failed to complete its latest cutbacks. Iraq and the United Arab Emirates continue to pump several hundred thousand barrels a day above their agreed limits, according to a Bloomberg survey.

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