Oil prices declined on Thursday following a substantial build in US crude inventories that signaled weaker demand, while expectations of further interest rate hikes added pressure.
Brent crude futures slipped 14 cents, or 0.2%, to $83.54 a barrel, reversing a minor 3 cent gain in the previous session. West Texas Intermediate (WTI) crude futures edged down 4 cents, or 0.1%, to $78.50 a barrel.
The drops came after US government data showed a larger-than-forecast increase in domestic crude stockpiles, sparking worries over slackening oil demand in the world’s biggest economy. At the same time, signs that US interest rates could stay elevated for longer dampened the outlook for near-term economic growth and fuel consumption.
According to the US Energy Information Administration (EIA), crude oil inventories rose 4.2 million barrels last week, surpassing analysts’ expectations for a 2.7 million barrel build. This marked the fifth straight weekly increase, with stockpiles now sitting at 447.2 million barrels.
“The substantial stockpile build heightened investors’ concerns about slow demand in the US,” explained Satoru Yoshida, a commodity analyst at Rakuten Securities. “The possibility of delayed US rate cuts also weighed on market sentiment, as higher borrowing costs for longer could undermine oil demand,” he added.
As traders scale back bets on US rate cuts kicking off in the first half of 2023 amid resilient economic data, expectations for interest rate hikes to extend through this year mount. More aggressive tightening by the Federal Reserve typically slows economic expansion and crimps fuel usage.
Market attention now turns to Thursday’s release of the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index. The report could provide further clues on the central bank’s policy path. A hotter-than-expected reading would likely reinforce views that rates will remain elevated for longer to bring down stubbornly high inflation.
“With the demand outlook remaining uncertain, we think OPEC will extend the current supply agreement to the end of the second quarter,” said analysts Daniel Hynes and Soni Kumari at ANZ Bank. This could lend some support to prices by limiting supply growth in the near term.
The bank kept its price outlook unchanged, forecasting 2024 Brent to average $86 per barrel and WTI to average $81.
Geopolitical tensions in the Middle East are also expected to put a floor under oil prices, Yoshida noted. Hamas recently called on Palestinians to march on Jerusalem’s Al-Aqsa Mosque when Ramadan starts next month, upping the ante in truce talks regarding Gaza.
Though both Israel and Hamas have played down near-term deal prospects, the conflict continues fueling regional uncertainty. US President Joe Biden hopes to have a Gaza ceasefire in place before Ramadan begins.
Crude Inventories Expand While Gasoline, Distillate Stocks Shrink
According to EIA data, the 4.2 million barrel increase in US crude stockpiles last week coincided with draws in gasoline and distillate inventories as refiners operated at below-seasonal rates.
Multiple planned and unplanned refinery outages constrained run rates, keeping gasoline supplies tight. Gasoline stocks fell by 1.8 million barrels, compared to expectations for a 1.1 million barrel drop.
Meanwhile, distillate inventories, which include diesel and heating oil, declined by 500,000 barrels against forecasts for a 1 million barrel decrease. Low distillate stocks ahead of peak winter heating demand have driven diesel prices sharply higher.
With refining capacity limited by outages, crude stocks rose while refined product inventories fell. The data highlights how unreliable refinery operations have contributed to volatility in fuel supplies.
“Refiners ran at below-normal levels last week owing to both scheduled and unscheduled maintenance,” noted Ed Moya, Senior Market Analyst at OANDA. This “led to a larger-than-expected build in crude inventories along with draws to gasoline and distillate stockpiles.”
OPEC+ Supply Management Expected to Extend into Q3
Even as economic concerns threaten to dent consumption, OPEC and allies including Russia are seen renewing production curbs to balance the market into the third quarter.
The group known as OPEC+ is expected to extend its output deal, first introduced in 2017, when it meets in coming months. The agreement currently calls for collective cuts of 2 million barrels per day (bpd) through the end of June.
“With the demand outlook remaining uncertain, we think OPEC will extend the current supply agreement to the end of the second quarter,” said ANZ analysts Hynes and Kumari.
Since the output accord went into effect, OPEC+ has taken a cautious approach to restoring production. The strategy has aimed at steering clear of a new glut while providing some supply relief to major consumers like the US and Europe.
Renewing cuts into the second half of 2023 would maintain this careful balancing act amid cloudy demand projections. But Russia’s participation remains a key wild card given Western sanctions imposed over its invasion of Ukraine.
Outlook Hinges on Demand Resilience, Fed Policy, Geopolitics
Oil’s path forward will ultimately depend on the interplay between consumption trends, central bank moves and geopolitical flare-ups.
On the demand side, any slide in global growth from monetary tightening or a potential recession in key economies would weigh on crude. But the expected extension of OPEC+ curbs could prevent excess supply from building.
How aggressively the Fed hikes rates and how long it keeps policy restrictive will also impact oil, given links between interest rates, expansion and fuel use. An easing of inflation readings or material economic weakness could prompt earlier rate cuts.
At the same time, conflicts from Eastern Europe to the Middle East threaten supply disruptions. Any military escalations could send prices spiking, offsetting demand-related drops.
With crosscurrents buffeting the market, forecasting oil’s next moves grows challenging. For now, the OPEC+ deal’s likely prolongment into the third quarter offers some price stability. But beyond that, much depends on whether demand holds up or buckles under economic and monetary strains.
