- There were fears in the market of a rising risk of escalation in the Gaza war.
- US crude inventories increased by 3.6 million barrels last week.
- Data on Wednesday revealed a bigger-than-expected drop in US new home sales.
Oil prices increased slightly on Wednesday as investors worried about supply due to escalating Middle East tensions. These supply worries overshadowed an unexpected jump in US crude inventories last week.
Since the start of the war between Israel and Gaza, there has been a risk of escalation that has supported oil prices. Moreover, ceasefire talks have failed to pause the war, keeping that risk element in play.
On Wednesday, there were fears in the market of a rising risk of escalation in the Gaza war. Such an outcome could disrupt oil supplies, especially if it includes significant oil-producer countries like Iran. Recently, there have been rising tensions between Israel and Lebanon that have raised concerns about a new war.
Crude stocks vs WTI (Source: Nymex, EIA)
Meanwhile, the Energy and Information Administration reported that US crude inventories increased by 3.6 million barrels last week. This was a surprise since analysts had expected a decline. Consequently, oil fell after the report. The weak demand in the summer driving season is alarming. Ideally, this is when there are many vehicles on the roads and consumption is high.
Markets also kept an eye on the US central bank’s rate cut outlook. Recent data from the US has supported expectations for two rate cuts this year. Inflation seems to be back on its downtrend, and the economy is starting to show weakness, with poor GDP and retail sales data. Notably, data on Wednesday revealed a bigger-than-expected drop in new home sales, indicating weakness in the US housing sector.
However, despite all these signs of weakness, Fed policymakers have remained relatively hawkish. Several have spoken this week, including Austan Goolsbee, Lisa Cook, and Michelle Bowman. From their speeches, it is clear that the Fed is on a path to rate cuts. However, they are awaiting more evidence that inflation will continue declining. Therefore, while markets expect two rate cuts this year, policymakers forecast just one.
Lower interest rates benefit oil by allowing the economy to grow and increasing fuel consumption. Therefore, oil prices might rise if upcoming data points to lower inflation and a weaker economy. The next major report is the PCE price index report, which is expected to show inflation easing to 2.6% in May from 2.7% in April.
