Oil dips after hitting seven-week highs on demand hopes, war jitters

Oil prices dipped on Wednesday after hitting seven-week highs as summer demand optimism and concerns over escalating conflicts offset an industry report that said US crude inventories unexpectedly rose.

Brent crude futures slipped 6 cents, or 0.1%, to USD 85.27 a barrel by 1943 GMT, while US West Texas Intermediate crude CLc1 was down 10 cents, or 0.1%, at USD 81.47 per barrel.

Brent reached USD 85.84 a barrel earlier in the session, its highest since May 1, while WTI traded up to USD 81.96 a barrel, the highest level since April 30.

Trading activity was thin due to a US federal holiday.

“The current snapshot presents an underwhelming picture but there are green shoots that indicate a more optimistic outlook,” said Tamas Varga of oil broker PVM.

The Brent price being USD 8 over the lows hit in early June “shows genuine optimism that the global oil balance will eventually tighten,” Varga added.

Both benchmarks, having recovered strongly in the last two weeks, gained more than USD 1 in the previous session after a Ukrainian drone strike led to an oil terminal fire at a major Russian port.

In the Middle East, Israeli Foreign Minister Israel Katz warned of a possible “all-out war” with Lebanon’s Hezbollah, even as the US attempted to avoid a broader conflict between Israel and the Iran-backed group.

An escalating war risks supply disruption in the oil-producing region.

“The potential escalation of tensions in the Middle East is adding some supply risk to the oil demand equation,” said Bart Melek, head of commodity strategy at TD Bank, adding recent US economic data supported bets the Federal Reserve would move towards cutting interest rates in coming months.

China data this week showed May industrial output lagged expectations, but retail sales, a gauge of consumption, marked the quickest growth since February.

Meanwhile, US crude stocks rose by 2.264 million barrels in the week ended June 14, market sources said on Tuesday, citing American Petroleum Institute figures. Analysts polled by Reuters had expected a 2.2-million-barrel draw in crude stocks.

However, gasoline inventories fell by 1.077 million barrels, while distillates rose by 538,000 barrels, the sources said, speaking on condition of anonymity.

Official stocks data from the US Energy Information Administration is due on Thursday.

(Additional reporting by Laila Kearney in New York, Emily Chow in Singapore, and Noah Browning in London; editing by Jason Neely, Elaine Hardcastle, Chris Reese, and Rod Nickel)