Oil prices drop due to concerns about demand amid the Fed’s interest rate trajectory
Oil prices continued to decline in Asian trading on Tuesday as investors anticipated ongoing U.S. inflation and higher interest rates, which could reduce consumer and industrial demand.
Brent crude futures dropped 57 cents, or 0.68%, to $83.14 per barrel. U.S. West Texas Intermediate crude (WTI) fell 58 cents, or 0.73%, to $79.22 per barrel.
On Monday, both benchmarks fell by less than 1% after U.S. Federal Reserve officials indicated they were waiting for more signs of slowing inflation before considering interest rate cuts.
“Fears of weaker demand led to selling as the prospect of a Fed rate cut became more distant,” said analyst.
Fed Vice Chair Philip Jefferson stated on Monday that it was too early to determine if the inflation slowdown is “long-lasting,” while Vice Chair Michael Barr mentioned that restrictive policy needs more time. Atlanta Fed President Raphael Bostic added that it would “take a while” for the central bank to be confident that a slowdown in price growth is sustainable.
Overall, Fed officials suggested that interest rates might remain elevated for longer than markets expect. This has implications for the oil market, as higher borrowing costs can hinder economic growth and reduce demand for crude.
Meanwhile, the market showed little reaction to political uncertainty in two major oil-producing countries.
“Although there was a brief price increase due to uncertainty in Iran, prices have since retreated as investors assume current policies will continue and that a wider regional conflict is unlikely,” IG market strategist Yeap Jun Rong said in an email to Reuters.
Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, was killed in a helicopter crash on Sunday. Separately, Saudi Arabia’s Crown Prince Mohammed Bin Salman postponed a trip to Japan due to his father’s health issues.
“The death of the Iranian President and the Saudi king’s health issue don’t seem to be affecting the market much, as it’s unclear whether they will have an immediate impact on energy policy,” Fujitomi’s Tazawa added.
Investors are focusing on supply from the Organization of the Petroleum Exporting Countries and its affiliates, known as OPEC+. They are set to meet on June 1 to decide on output policy, including whether to extend some members’ voluntary cuts totaling 2.2 million barrels per day.
“Prices are awaiting a catalyst to drive a breakout from the current range, with attention on any geopolitical developments and oil inventory data this week,” IG’s Yeap said.
OPEC+ could extend some voluntary output cuts if demand does not pick up, according to sources familiar with the matter.
