Crude Oil Futures
Fundamental Analysis

Oil Prices Break Lows, Finish Strong Amid Supply Concerns

  • Oil was set to end the month with a 4.5% gain.
  • The oil market has grown tighter due to geopolitical tensions.
  • Investors eagerly await the US core PCE price index report on Friday.

On Wednesday, oil prices broke below the previous session’s lows before closing with gains as supply worries continued. Moreover, oil was set to end the month with a 4.5% gain, marking the third consecutive bullish month. 

Notably, the oil market has grown tighter due to geopolitical tensions. All meetings to try and pause the Israel-Hamas war have ended without agreements. At the same time, the Russia-Ukraine war got worse when Ukraine started hitting Russia’s refineries. Consequently, oil prices have risen amid supply worries. A deficit in the markets naturally pushes up prices, especially when supply fails to meet demand.

US crude inventories (Source: EIA)

US crude inventories (Source: EIA)

However, oil fell in the last session despite a lower-than-expected increase in crude oil inventories. This increase came as imports rose. However, analysts believe this increase will be short-lived due to the deficit in the global market. Therefore, inventories might drop in the future.

Furthermore, oil has been under pressure due to the recent surge in the dollar. Interest rate cut expectations have declined as markets become less certain about the Fed’s policy outlook. Fed policymakers have expressed doubt after the last inflation report, leading to the recent recovery in the dollar.

Fed’s Chris Waller said that the inflation report showed that the Fed should delay rate cuts. At the same time, the resilient economy gives the central bank enough room to keep holding higher interest rates. A delay in rate cuts is bearish for oil as it extends the period of high borrowing costs and low demand. At the same time, a stronger dollar makes oil more expensive in the foreign market, hurting demand.

Investors are waiting eagerly for the core PCE price index report on Friday. Economists expect the figure to drop from 0.4% to 0.3%. If inflation declines, Fed rate cut bets will go up, and oil will rally. However, if inflation beats forecasts, the outlook for rate cuts might change completely. Moreover, oil will likely fall. At the moment, markets show a 60% chance of a June Fed rate cut. This figure has dropped from around 70% last week.

Elsewhere, markets are gearing up for next week’s OPEC meeting. However, most analysts do not expect any changes in policy until the June meeting.