Oil falls 1% on sticky US inflation, dampened geopolitical risk premium

HOUSTON – Oil prices settled 1% lower on Tuesday as lingering US inflation looked likely to keep interest rates higher for longer, weighing on fuel demand.

Brent crude futures settled down 83 cents, or 1%, to USD 82.88 a barrel. US West Texas Intermediate crude (WTI) futures for June, which expired on Tuesday, slipped by 54 cents, or 0.7%, to USD 79.26.

The more active July contract settled down 64 cents, at USD 78.66.

Higher borrowing costs can slow economic growth and pressure oil demand.

“The market is very focused on gasoline demand in the US because there are signs that consumers are cutting back because of inflation. Unless that turns around, the market is suggesting things could be a little bleak,” said Phil Flynn, an analyst at Price Futures Group.

Ahead of this weekend’s Memorial Day holiday, which kicks off the US peak summer driving season, retail gasoline prices fell for the fourth consecutive week to USD 3.58 per gallon on Monday, the Energy Information Administration (EIA) said in its gasoline and diesel fuel update.

The US will sell the nearly 1 million barrels of gasoline in a reserve in northeastern states, with bids due on May 28, the Department of Energy said on Tuesday.

US diesel prices have also slipped, according to the EIA, down 5.9 cents on the week on Monday, at USD 3.89 per gallon. Diesel is a key refined product for both the industrial sector and transport.

Investors are awaiting minutes from the Fed’s last policy meeting due on Wednesday, as well as weekly US oil inventory data from the EIA, also due on Wednesday.

“There is nothing in the market right now that is pushing prices higher. If we see a little bit of a stock draw tomorrow that may help push prices back up into the USD 78.50-USD 80 per barrel range,” said Tim Snyder, economist at Matador Economics.

US crude oil and gasoline inventories rose last week, while distillates fell, according to market sources citing American Petroleum Institute (API) figures on Tuesday.

The API figures showed crude stocks were up by 2.48 million barrels in the week ended May 17, the sources said on condition of anonymity. Gasoline inventories rose by 2.1 million barrels, and distillates fell by 320,000 barrels.

Two Federal Reserve policymakers on Tuesday said it was prudent for the US central bank to wait several more months to ensure that inflation is back on a path to the 2% target before commencing interest rate cuts.

The economic outlook in Europe is more positive. European Central Bank President Christine Lagarde said in an interview she was “really confident” that eurozone inflation is under control. The ECB has all but promised a rate cut on June 6, so policymakers have shifted their attention to debating where rates will go thereafter.

The market appeared largely unaffected by the death of Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, in a helicopter crash on Sunday.

The structure of the Brent contract is weakening in an indication of a softer market and strong supply.

The front-month Brent contract’s premium to the second-month contract narrowed to 10 cents, its weakest since January.

(Reporting by Georgina McCartney in Houston, Noah Browning; Additional reporting by Deep Vakil in Bengaluru, Yuka Obayashi in Tokyo, and Trixie Yap in Singapore; Editing by David Goodman, Marguerita Choy, Bill Berkrot, Kevin Liffey, and David Gregorio)