Oil prices experienced a 2% decline on Wednesday, reaching a two-week low, as the U.S. Dollar strengthened. Despite a sharp decrease in U.S. crude inventories, concerns over potential Federal Reserve interest rate hikes and their potential impact on energy demand in the world's largest consumer contributed to the fall in prices.
Impact of Stronger U.S. Dollar and Global Economic Factors on Oil Demand
The strengthening U.S. Dollar can negatively affect global oil demand as it becomes more expensive for other countries. Additionally, high European inflation and inconsistent economic data from China, the world's largest crude importer, discouraged investors.
Brent and WTI Crude Futures Experience Lowest Closes Since March 31
Brent futures for June delivery settled at $83.12 a barrel, falling 2.0%, while West Texas Intermediate (WTI) crude for May delivery settled at $79.16, dropping 2.1%. The June WTI contract also lost 2.1% to settle at $79.24. These were the lowest closes for both benchmarks since March 31, erasing most gains since the surprise OPEC+ oil output cut on April 2.
Market Focus on Supply Side Overshadowing Weaker Global Oil Demand
Analysts at energy consulting firm Ritterbusch and Associates argue that the market needs to be more focused on the supply side of the global oil equation following OPEC output cuts and that world oil demand is significantly weaker than widely perceived.
U.S. Crude Stockpiles Drop by 4.6 Million Barrels, Exceeding Expectations
The U.S. Energy Information Administration (EIA) reported that U.S. crude stockpiles fell by a larger-than-expected 4.6 million barrels last week as refinery runs and exports increased. Gasoline inventories also rose unexpectedly due to disappointing demand.
China's Uneven Economic Recovery and Global Market Performance
China's stock markets closed lower due to inconsistent first-quarter data, indicating a bumpy economic recovery after abandoning its strict zero-COVID-19 policy. Stock market indexes worldwide also slipped as investors analyzed the latest earnings reports. British inflation data reinforced expectations of further interest rate hikes by the U.S. Federal Reserve and other central banks.
Central Banks Eye Further Interest Rate Hikes
Atlanta Fed President Raphael Bostic stated that the Federal Reserve would likely implement one more interest rate hike. Meanwhile, European Central Bank officials remain cautious of inflation, suggesting the possibility of further rate hikes.
Asian Refiners Purchasing Russian Crude and Rising U.S .Heating Oil Futures
Adding pressure to oil benchmarks, Asian refiners have continued buying Russian crude in April. India and China have purchased most Russian oil at prices above the Western price cap of $60 a barrel. Oil loadings from Russia's western ports will rise to their highest level since 2019, despite Moscow's pledge to reduce output. In the U.S., heating oil futures closed at their lowest since January 2022 for a second day due to low diesel demand, reducing refining profit margins.