Oil falls on prospect of higher-for-longer interest rates

Persistent inflation and a strong dollar could hinder demand from Chinese customers

China, the top global crude importer, recorded a rise in exports and imports in April, a rebound from a contraction in the preceding month, indicating growing momentum in the world's second-largest economy. Xinhua via APShow less

Oil prices fell by nearly $1 a barrel on Friday but recorded a weekly gain, buoyed by a rise in the geopolitical risk premium in the Middle East and signs of a strengthening Chinese economy.

Comments from US central bank officials indicated higher-for-longer interest rates, which could hinder demand from the world's largest crude consumers.

Brent, the benchmark for two thirds of the world’s oil, shed 1.09 per cent to settle at $82.79 a barrel.

West Texas Intermediate, the gauge that tracks US crude, retreated 1 per cent to close at $78.26 a barrel.

For the week, Brent logged a 0.2 per cent loss, while WTI recorded a rise of 0.2 per cent.

The US dollar strengthened after the Fed officials' comments, making greenback-denominated commodities more expensive for buyers using other currencies.

Higher-for-longer US interest rates could also dampen demand.

Meanwhile, China, the top global crude importer, recorded a rise in exports and imports in April, a rebound from a contraction in the preceding month, indicating growing momentum in the world's second-largest economy.

Exports from China grew 1.5 per cent on an annual basis last month after falling 7.5 per cent in March, which marked the first contraction since November, according to customs data.

The country’s imports surged by 8.4 per cent in April, reversing a 1.9 per cent decline seen in March.

In the US, initial claims for unemployment benefits rose 22,000 to a seasonally adjusted 231,000 for the week that ended on May 4, the highest level since the end of last August, the Labour Department said on Thursday.

The Federal Reserve closely monitors US jobs data as part of its assessment of the overall health of the economy.

Last week, the Fed kept interest rates unchanged, with the target range steady between 5.25 per cent and 5.5 per cent, after April's economic data indicated a “lack of further progress” in the central bank's fight to restore price stability.

A drop in Fed's policy rate will stimulate economic growth, which in turn will support demand for crude in the US.

Contrary to the Fed's steady approach, central banks in other parts of the world, however, are loosening monetary policy to support economic growth.

The Swiss central bank lowered its policy rate in the first quarter, while the European Central Bank is widely expected to cut rates in June.

“What’s interesting is the European and Brits’ determination to ease their monetary policies regardless of what the Fed will do, despite the risk of seeing their currencies depreciate and re-boost the domestic price pressures,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Yet the European policymakers’ new slogan ‘data-dependent, not Fed-dependent’ will seemingly keep them on a dovish diverging path as long as the dollar’s appreciation remains manageable,” she added.

Oil prices have fallen by about 7 per cent since reaching a six-month high of $91.17 a barrel in early April when Houthi attacks on ships in the Red Sea and the war between Israel and Hamas sparked concerns of a broader conflict.

Israel on Friday intensified its assault on Gaza after truce talks in Cairo failed to secure a deal.

Heavy shelling continued across the besieged enclave while the southern Gaza city of Rafah was hit with artillery strikes. Several deaths were reported, including children.

Crude futures are continuing gains for the second session in a row “as the Middle East geopolitical risk premium crept higher”, according to oil market consultancy Vanda Insights.

“Fresh strains between the [Israeli] government of Prime Minister Benjamin Netanyahu and the Joe Biden administration in the US were seen as further diminishing the chances of a ceasefire.”

On the supply side, the Opec+ alliance of oil-producing countries is widely expected by analysts to roll over its current voluntary output cuts of 2.2 million barrels per day when it meets on June 1.

“[That] would send a signal to oil markets that Opec+ wants to keep inventory levels under control and avoid blowing out stockpiles amid healthy projections for non-Opec+ supply growth and trend-level demand growth,” Emirates NBD said in a research note this week.

US crude inventories, an indicator of fuel demand, fell by 1.4 million barrels to 459.5 million barrels last week, according to the US Energy Information Administration.

Analysts polled by Reuters had been expecting a drop of 1.1 million barrels.