Oil prices settle down 1%; strong US data boosts dollar

NEW YORK, May 18 (Reuters) – Oil prices slid about 1% on Thursday after solid US economic data spurred the dollar to reach a two-month high on growing expectations the US Federal Reserve could raise interest rates again in June.

Brent futures fell USD 1.10, or 1.4%, to settle at USD 75.86 a barrel. US West Texas Intermediate (WTI) crude fell 97 cents, or 1.3%, to settle at USD 71.86.

The US dollar rose to its highest since March 17 against a basket of currencies on data showing lower-than-expected initial jobless claims and optimism about a possible debt ceiling deal.

A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

US inflation does not seem to be cooling fast enough to allow the Federal Reserve to pause its interest-rate hike campaign, according to two Fed policymakers.

From remarks from Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard, it appeared that a minority hawkish view has gained ground at the Fed in the runup to the next policy meeting on June 13-14.

High interest rates boost borrowing costs, which can slow the economy and reduce oil demand.

“Good news for the economy is now bad news for the crude demand outlook as economic resilience will force the Fed to kill the economy,” said Edward Moya, senior market analyst at data and analytics firm OANDA.

The strength of April US economic data in addition to optimism about the debt ceiling negotiations have strengthened market expectations of a further hike, ANZ Research said in a note on Thursday.

President Joe Biden and top US congressional Republican Kevin McCarthy on Wednesday underscored their determination to reach a deal to raise the federal government’s USD 31.4 trillion debt ceiling. The government could run out of money to pay its bills as soon as June 1.

US Vice President Kamala Harris and Biden’s top economic adviser, Lael Brainard, said a debt default would throw the economy into a recession.

Meanwhile, European Central Bank (ECB) Vice President Luis de Guindos said the ECB will have to keep raising interest rates further to bring inflation back to its mid-term goal of 2% though most of the tightening has already been done.

Also weighing on oil prices, blue-chip stocks in China, the world’s biggest oil importer, slipped after the country’s industrial output and retail sales growth undershot forecasts, suggesting the economic recovery is losing momentum.

Another factor that could reduce oil demand was a fire in Mexico at the Salina Cruz refinery owned by Mexican state oil company Pemex. Workers were evacuated, no one was injured and the fire has been controlled, according to the local Red Cross.

On the supply side, Saudi Arabia’s crude oil exports rose about 1% to 7.52 million barrels per day (bpd) in March from the previous month, according to data from the Joint Organisations Data Initiative (JODI).

Kpler and Petro Logistics, which also monitor shipments, however, have said Saudi exports may have fallen in May as a voluntary production cut pledged by the kingdom and other Organization of the Petroleum Exporting Countries (OPEC) plus their allies, a group known as OPEC+, takes hold.

(Reporting by Shadia Nasralla in London, Stephanie Kelly in New York, and Sudarshan Varadhan in Singapore; Editing by Marguerita Choy, Kirsten Donovan, Nick Macfie, and David Gregorio)