Brent Crude Futures Decline Amid Economic Concerns
Brent crude futures recently fell by $1.21, or 1.45%, to $82.50 per barrel. Higher borrowing costs have negatively impacted economic growth and demand for crude oil.
International crude oil prices declined by over 1% on Tuesday, May 21, 2024, due to persistent US inflation concerns which could keep interest rates elevated for an extended period, potentially dampening consumer demand. Higher borrowing costs limit funds, affecting economic growth and crude oil demand, while also putting pressure on consumer demand at the pump.
Brent crude futures dropped by $1.21, or 1.45%, to $82.50 per barrel. US West Texas Intermediate crude (WTI) futures for June declined by $1.26, or 1.58%, to $78.54. The more active July contract decreased by $1.09, or 1.37%, to $78.21. The weakening structure of the Brent contract indicates a softer market and strong supply.
The premium of the front-month Brent contract to the second-month contract narrowed to 10 cents, the weakest since January 2024, according to Reuters. Domestically, crude oil futures last traded 0.02% higher at ₹6,569 per barrel on the Multi Commodity Exchange (MCX).
Factors Putting Crude Oil Under Pressure
- Focus on Gasoline Demand: Analysts highlight that the market is heavily focused on gasoline demand in the US, with signs that consumers are cutting back due to inflation. This suggests a potentially bleak outlook unless the trend reverses.
- Retail Gasoline Prices: Despite the upcoming Memorial Day holiday, which marks the start of the US peak summer driving season, retail gasoline prices fell for the fourth consecutive week to $3.58 per gallon on Monday, according to the Energy Information Administration (EIA).
- Supply Measures: To ensure sufficient supply in the northeast, the US will sell nearly one million barrels of gasoline from a reserve in northeastern states, with bids due on May 28, as announced by the Department of Energy.
- Fed Meeting Minutes and Inventory Data: Investors are awaiting minutes from the US Federal Reserve’s last policy meeting, due on Wednesday, along with weekly US oil inventory data. Analysts indicate there is currently no market force pushing prices higher.
- Fed Officials’ Comments: Federal Reserve officials have indicated that interest rates may stay higher for longer than previously expected. Two policymakers emphasized the need to wait several more months to ensure inflation is on track to reach the 2% target before considering interest rate cuts.
- Fed Governor’s Stance: Fed Governor Christopher Waller stated, “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.”
- Geopolitical Risks: The ongoing war in Gaza and the death of Iranian President Ebrahim Raisi in a helicopter crash have not significantly impacted the market. The market perceives that Israeli actions in Rafah are not affecting supply or demand, and Iranian oil policy is unlikely to change substantially post-president’s death.
- OPEC+ Supply: Investors are focusing on supply from the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+), who are scheduled to meet on June 1 to set output policy. They may extend some voluntary supply cuts if demand does not improve.
Future Price Directions
Analysts suggest that WTI crude oil futures are under pressure as investors weigh weak demand prospects against a lack of supply disruptions. Hawkish comments from Fed officials have reinforced the belief that rates might stay higher for longer, and the magnitude of cuts might be less than market expectations, which could affect future oil demand, according to Kaynat Chainwala, Senior Manager, Commodities Research at Kotak Securities.
Recent events, such as Ukraine’s attacks on Russian refineries and a Houthi missile strike in the Red Sea, continue to pose risks to global supply. Fed officials’ comments have led to profit-taking from higher levels and a rebound in the dollar index.
Rahul Kalantri, VP Commodities at Mehta Equities Ltd., stated, “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.”
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