Crude Oil News Today: Fed Rate Concerns, Rising US Inventories Weigh on Prices

Oil Prices Drop on Fed Rate Expectations and Inventory Builds

Oil prices fell over 1% on Wednesday, marking a third consecutive day of declines. The drop is driven by expectations that the Federal Reserve may maintain higher interest rates for a longer period due to persistent inflation. This scenario could dampen fuel consumption in the United States, the world’s largest oil consumer. The fundamental outlook for oil remains bleak, with uncertainty surrounding the timing of a potential Fed rate cut. Technically, prices dropped below the 200-day moving average.

At 10:24 GMT, Light Crude Oil futures are trading $78.03, down $0.63 or -0.80%.

US Inventories Increase

Adding to the market’s bearish sentiment, U.S. crude oil and gasoline inventories rose last week. The American Petroleum Institute (API) reported a 2.48 million barrel increase in crude oil inventories for the week ending May 10. This followed a 3.104 million barrel decrease the previous week. Gasoline inventories increased by 2.088 million barrels, while distillate inventories fell by 320,000 barrels. Cushing, Oklahoma, storage levels rose by 1.77 million barrels, further weighing on prices. The U.S. will report official government figures at 14:30 GMT.

The Department of Energy also noted a 1 million barrel rise in the Strategic Petroleum Reserve (SPR), bringing total reserves to 368.8 million barrels.

Global Market Weakness

Global physical crude markets are weakening, evidenced by the narrowing premium of Brent’s first-month contract over the second, known as backwardation. This premium is near its lowest level since January, reflecting soft refinery demand and ample supply. Analysts attribute the weakness to high interest rates and inflation, which are reducing consumer and industrial demand, particularly in Europe. Additionally, rising output from non-OPEC producers like the United States is exacerbating the oversupply, potentially supporting arguments for OPEC+ to maintain production cuts in their upcoming meeting.

Fed’s Stance on Rates

Federal Reserve policymakers have emphasized the need for patience before considering rate cuts. Fed Governor Christopher Waller and Cleveland Fed President Loretta Mester both stressed the importance of several more months of favorable inflation data before supporting a policy easing. This cautious approach is shared by other Fed officials, who are wary of prematurely stimulating the economy and reigniting inflation. The Fed has maintained its benchmark policy rate at 5.25%-5.50% since July 2023 and remains vigilant in its efforts to steer inflation towards its 2% target.

Market Forecast

Given the rising inventories, weak global demand, and the Fed’s stance on maintaining higher interest rates, the short-term outlook for oil prices remains bearish. Traders should prepare for potential further declines as market fundamentals suggest continued pressure on prices. The combination of ample supply and tepid demand, coupled with the absence of immediate policy support from the Fed, points to a challenging environment for oil in the near term.

Technical Analysis

Light crude oil futures are lower on Wednesday after falling below the crucial 200-day moving average a $78.21. This indicator is new resistance.

A sustained move under this long-term indicator will put the recent bottom at $76.21 on the radar.

Recovering the 200-day moving average will signal the return of buyers with the first target a short-term top at $80.11, followed by the 50-day moving average at $81.10.