Oil posts weekly decline on prospect of higher-for-longer US interest rates

US crude stocks, an indicator of fuel demand, increased by 1.8 million barrels in the week ending May 17

The US Federal Reserve building in Washington. US policymakers are questioning whether the current interest rates are sufficient to curb inflation. Reuters

Oil prices rose on Friday but recorded a weekly loss amid concerns that the US Federal Reserve will keep interest rates higher for longer to tackle stubborn inflation.

Brent, the global benchmark for two thirds of the world's oil, settled higher at $82.12 a barrel.

West Texas Intermediate, the gauge that tracks US crude, rose 1.1 per cent to settle higher at $77.72 a barrel.

Both benchmarks reached multi-month lows on Thursday, with Brent crude futures closing at their lowest level since January and WTI dropping to a three-month low.

Meanwhile, US crude stocks, an indicator of fuel demand, increased by 1.8 million barrels in the week that ended on May 17, according to the US Energy Information Administration.

However, analysts polled by Reuters were expecting a fall of 2.5 million barrels.

Total petroleum inventories decreased by about 900,000 barrels last week, while distillate stocks rose by 400,000 barrels, the EIA data showed.

Crude futures have come under pressure this week as the Fed seems unlikely to cut interest rates soon.

The US Consumer Price Index inflation rose 3.4 per cent on an annual basis in April, the Labour Department said this month.

Minutes from the central bank’s latest policy meeting, released on Wednesday, showed that policymakers are questioning whether the current interest rates are sufficient to curb persistent inflation.

Officials noted that although they expect inflation to return to the 2 per cent target over the medium term, recent economic data had not increased their confidence, suggesting that the disinflation process would likely take longer than previously anticipated.

The document also showed that several participants expressed “a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate”.

Although general market sentiment remains cautious due to concerns about higher interest rates affecting the economy and resulting in weak oil demand growth, real-time mobility data shows that oil demand growth is still “broadly healthy”, Giovanni Staunovo, strategist at UBS, said.

“There has also been market concern about the recent increase in oil inventories. A milder winter in parts of the northern hemisphere and higher crude exports by some Opec countries in March could have played a role for that build up,” he added.

On the supply side, the Opec+ alliance of oil producers is widely expected by analysts to extend voluntary output curbs of 2.2 million barrels a day into the second half of 2024. The group is set to meet on June 1.

“We expect the eight Opec+ member states with voluntary production cuts to extend them for at least three months,” Mr Staunovo said.

UBS expects Brent to rise to $91 a barrel over the coming months, based on its view that the oil market is undersupplied.

“Based on our numbers, there's room for them [Opec+] to increase production,” Toril Bosoni, head of oil industry and markets division at the International Energy Agency, told The National this week.

The Paris-based agency expects global oil demand to grow by 1.1 million bpd this year and 1.2 million bpd in 2025.

“Some of the weakness this year is also due to weather, it's been very mild for a second consecutive winter,” she said.

“Even with this relative weakness in oil demand, we do see an increased call on Opec crude in the second half of the year.”