Oil eases as stock build raises spectre of slower US demand

Oil prices fell on Thursday following an unexpected increase in US stockpiles, raising concerns about weak demand from the world’s largest oil consumer. However, the decline was limited by fears that the Gaza conflict could expand and disrupt Middle Eastern oil supplies. As of 06 35 GMT, Brent crude oil futures had decreased by 6 cents, or 0.1%, to USD 85.19 per barrel, while US West Texas Intermediate crude futures dropped 10 cents, or 0.1%, to USD 80.80 per barrel. Both benchmarks had closed slightly higher on Wednesday.

“An unexpected rise in US crude oil and gasoline inventories is pressuring the market due to concerns over weakening demand,” said Tsuyoshi Ueno, senior economist at NLI Research Institute. “However, the market remains in a tug-of-war, supported by the risk that escalating tensions between Israel and Hezbollah could disrupt supply.”

The US Energy Information Administration (EIA) reported a 3.6 million barrel increase in the nation’s crude oil stocks last week, contrary to analysts’ expectations of a 2.9 million-barrel drawdown. US gasoline stocks also rose by 2.7 million barrels, whereas analysts had anticipated a 1 million-barrel decrease. Additionally, the demand for motor gasoline, a proxy for overall consumption, fell by approximately 417,000 barrels per day last week, dropping to 8.97 million bpd. The four-week average for demand is about 2% lower than last year’s levels.

“We believe the market’s upside is limited by weak US gasoline demand despite the start of the peak summer driving season,” said Emril Jamil, a senior analyst at LSEG Oil Research. Gasoline margins, reflected by the crack spread between gasoline and crude oil, have been declining after peaking in March at the USD 30s-per-barrel range. “This weakness is exacerbated by sluggish diesel demand in both Europe and the US, with margins falling since last August,” he added.

Meanwhile, concerns about the Gaza conflict spreading to Lebanon have tempered the decline in oil prices. Cross-border tensions between Israel and Lebanon’s Hezbollah have been rising, increasing fears of a broader conflict that could involve major regional powers, including Iran. Turkish President Tayyip Erdogan expressed solidarity with Lebanon and urged regional countries to support Lebanon. Israeli forces conducted extensive strikes across Gaza on Wednesday, with reports of intense fighting in Rafah in the southern part of the Palestinian enclave.

These geopolitical tensions continue to pose a risk to oil supply stability, balancing the bearish impact of increased US stockpiles on oil prices.