Oil steadies as rates, seasonal demand tug prices

The oil market witnessed a relatively stable trading session on Friday as investors grappled with the implications of the latest comments from the U.S. Federal Reserve regarding interest rates and persistent inflation. Concurrently, signs of strengthening seasonal fuel demand in the U.S. provided a supportive counterweight to the market.

Brent crude futures, the international benchmark, inched up by 5 cents to USD 81.41 per barrel by 0640 GMT, while U.S. West Texas Intermediate (WTI) crude futures traded 2 cents higher at USD 76.89 per barrel.

Thursday’s trading session saw both benchmark crude prices settling at multi-month lows, with Brent crude futures closing at their weakest level since January and U.S. crude futures hitting a three-month nadir.

Based on the current trajectory, Brent futures are poised for a weekly decline of more than 3%, and WTI futures are on track for a nearly 4% slide compared to the previous week. This downward pressure can be attributed to the ongoing macroeconomic constraints in the U.S., which have kept oil prices in a delicate balance.

According to Priyanka Sachdeva, a senior market analyst at Phillip Nova, “The backdrop of ‘possibly higher-for-longer rates’ weighed significantly on oil prices this week.”

The minutes from the Federal Reserve’s latest policy meeting, released on Wednesday, revealed that policymakers were divided on whether the current interest rates are sufficiently high to rein in stubborn inflation. Some officials indicated their willingness to raise borrowing costs further if inflation surged, although Fed Chair Jerome Powell and other policymakers have since suggested that additional rate hikes are unlikely.

Higher interest rates could potentially slow economic growth and dampen fuel demand, a scenario that has kept oil prices in check.

On the other hand, strengthening gasoline demand in the U.S. ahead of the Memorial Day holiday weekend, traditionally considered the start of the summer driving season, has helped to stabilise prices. The Energy Information Administration (EIA) reported on Wednesday that gasoline demand in the U.S. reached its highest level since November, underscoring the importance of the upcoming driving season as a “pillar of the recovery in global demand growth,” according to analysts at ANZ.

Market participants are now keenly awaiting the outcome of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) meeting on June 1. The group is expected to discuss the potential extension of voluntary oil output cuts totalling 2.2 million barrels per day.

As ANZ analysts noted, “The market is also tentative about taking an aggressive positioning ahead of next week’s OPEC meeting, where supply policy will be discussed.”

The interplay between interest rate concerns, seasonal demand factors, and OPEC+ supply decisions will continue to shape the trajectory of oil prices in the coming weeks.