Oil Prices Fall as Uncertainties Cloud Demand Outlook

The oil market retreated as uncertainties clouded the demand outlook. The US Federal Reserve kept rates unchanged amidst an expectation of a slowdown in demand in China, and the United States. 

Geopolitical tensions continue to worsen amidst projections that global economic growth will remain unchanged in 2024. In the global market, prices of crude oil slid further after a sharp decline registered yesterday.

Brent lost 2.75% earlier today settling at $80.23 per barrel. The American benchmark, West Texas Intermediate (WTI), traded at the same time at $75.71 per barrel, down 0.18% from Wednesday’s close of $75.85 per barrel.

Crude oil prices retreated sharply yesterday amid broader negative sentiment in the market after the Federal Reserve left rates unchanged and dashed hopes for a rate cut anytime soon.

Brent’s front-month contract went down around 5% since making its peak earlier in the week. Prices declined during early Asian trade following the release of data reflecting bearish demand in the US.

Statistics from the Energy Information Administration (EIA) showed a rise in US commercial crude oil inventories of around 2.1 million barrels to 421.9 million barrels, compared to the American Petroleum Institute’s expectation of a fall of around 2.5 million barrels.

Gasoline inventories also rose by around 1.2 million barrels to 254.1 million barrels over the same period. However, price declines were limited by the predicted US Fed decision to keep its federal funds rate unchanged in the 5.25%–5.5% target range—the highest level in 23 years.

US Federal Reserve Chair Jerome Powell said at the latest Federal Open Market Committee (FOMC) meeting that he believes the policy rate is ‘likely’ at its peak in the monetary tightening cycle.

Powell added that ‘if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year,’ raising hopes of more oil demand.

The better-than-expected macroeconomic data raised the probability of interest rate cuts in June and contributed to oil price upticks.

The decision by China, the second-largest oil consumer in the world, to support the real estate industry financially after the country’s largest real estate company, Evergrande, filed for bankruptcy, also supported expectations that oil demand would rise in support of higher prices.

Meanwhile, ongoing tensions in the Red Sea from the Israel-Palestine conflict continue to put supply chains at risk on one of the world’s most frequently used sea routes for oil and fuel shipments, driving oil prices up.

Yemen’s Houthi group said late Wednesday that they targeted an American commercial ship “headed to the ports of occupied Palestine with several naval missiles, resulting in a direct hit.” Banks Face Risks over 24hrs FX Positions Sell Down

A Houthi military spokesman said the assault was in response to US and UK aggression against Yemen and the injustice against the Palestinian people facing continuous Israeli aggression on the Gaza Strip.

The EIA weekly oil report was somewhat bearish for oil prices. US commercial crude oil inventories increased by 1.2MMbbls for the week ended on 26 January, the first increase in over three weeks.

The market was anticipating a drawdown of around 0.2MMbbls, while API reported a decline of 2.5MMbbls. However, when factoring in the strategic petrol reserve (SPR) releases, the build was even larger, with total US crude oil inventories increasing by around 2.1MMbbls.

Total US commercial crude oil stocks now stand at 422MMbbls, still around 5% below the five-year average.

The unexpected build in the stocks could be largely attributed to the slowing refinery operations due to lingering winter storm outages and planned refinery maintenance.  Distillate stockpiles fell by 2.54MMbbls last week, compared with expectations for a drawdown of 347Mbbls.

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