HG MARKETS:

Oil prices continued to decline following an industry report indicating rising US crude inventories, exacerbating bearish signals in the market. Brent crude traded around $82 per barrel, its lowest in three months, while West Texas Intermediate fell below $78. The American Petroleum Institute (API) reported a 2.5 million barrel increase in crude stockpiles last week.

These developments precede the upcoming OPEC+ meeting next month, where the group will decide on extending current supply curbs. Alongside declining oil futures, the market is witnessing Brent’s prompt spread nearing a bearish structure, suggesting a surplus of supply over demand. Although Brent crude is up about 7% year-to-date, buoyed by OPEC+ supply cuts, prices have softened since mid-April. It is anticipated that OPEC+ will extend output restrictions in their June 1 meeting. Meanwhile, geopolitical tensions persist, highlighted by recent drone strikes on Russian refineries and a missile attack on an oil tanker in the Red Sea.

If the API’s stockpile increase is corroborated by the Energy Information Administration (EIA) data later on Wednesday, it would mark the first inventory gain reported this month. However, analysts have forecasted a decrease. Additional metrics signaling market weakness include the Brent, which measures Dated Brent against futures, turning negative, and money managers reducing their bullish bets on Brent, despite increasing them for WTI.

Oil prices fell over 1% on Wednesday, marking a third consecutive day of declines, driven by expectations that the Federal Reserve may maintain higher interest rates for an extended period due to persistent inflation. This scenario could suppress fuel consumption in the United States, the world’s largest oil consumer. The overall outlook for oil remains pessimistic, with uncertainty regarding the timing of a potential Fed rate cut. Technically, prices fell below the 200-day moving average.

Further contributing to the bearish sentiment, U.S. crude oil and gasoline inventories rose last week. The API reported a 2.48 million barrel increase in crude oil inventories for the week ending May 10, following a 3.104 million barrel decrease the previous week. Gasoline inventories increased by 2.088 million barrels while distillate inventories declined by 320,000 barrels. Storage levels in Cushing, Oklahoma, rose by 1.77 million barrels, adding downward pressure on prices. The U.S. government is set to release official figures at 14:30 GMT. Additionally, the Department of Energy reported a 1 million barrel increase in the Strategic Petroleum Reserve (SPR), bringing total reserves to 368.8 million barrels.

Federal Reserve policymakers have emphasized the need for patience before considering rate cuts. Fed Governor Christopher Waller and Cleveland Fed President Loretta Mester both highlighted the necessity of several more months of favorable inflation data before endorsing policy easing. This cautious stance is echoed by other Fed officials, who are wary of prematurely stimulating the economy and reigniting inflation. The Fed has maintained its benchmark policy rate at 5.25%-5.50% since July 2023 and remains vigilant in its efforts to steer inflation towards its 2% target.