- Traders have been on edge since Iran attacked Israel.
- US crude inventories rose by 2.7 million barrels last week, beating forecasts for an increase of 1.4 million barrels.
- Fed officials have not given any clear guidance on the timing for rate cuts.
Oil prices fell by nearly 3% on Wednesday amid some calm in the Middle East and a significant increase in US crude inventories. Additionally, fading Fed rates cut expectations and signs of weak demand in China weighed heavily on prices.
Traders have been on edge since Iran attacked Israel, with some fearing retaliation and an escalation in the war. Since Israel’s attack on Iran’s embassy, investors have been worried that the war might include a major OPEC producer. However, when Iran finally attacked Israel, the impact was not as bad as expected.
Still, there is underlying tension as markets wait to see whether Israel will strike back. Such an outcome could be detrimental to the oil supply. Therefore, it might lead to a rally in prices. On the other hand, if nothing happens, prices might decline as investors focus on the weaker global demand indicators.
WTI futures, US crude stocks (Source: Bloomberg, EIA)
Notably, US crude inventories rose by 2.7 million barrels last week, beating forecasts for an increase of 1.4 million barrels. This jump reflects a decline in demand in the country, which is bearish for oil prices.
Recently, markets have been keen on economic data from the US. Although the economy has remained robust, the outlook for interest rates has shifted significantly. Investors now expect the first rate cut in the fourth quarter. Moreover, some believe the Fed might not cut rates if inflation holds above the 2% target.
Fed officials have not given any clear guidance on when the central bank might start cutting interest rates. Furthermore, Powell has admitted that restrictive monetary policy must continue for longer. High borrowing costs will eventually hurt the economy and have a negative impact on demand. Therefore, if the Fed keeps high rates for longer, the outlook for oil demand could drop.
In China, data revealed growth in the gross domestic product, with the value rising to 5.3% in Q1. However, investors focused on indicators that revealed frail demand in the economy. Although the slow recovery has been a big relief for policymakers, weak demand means weaker consumption of oil.
