Crude Market: Oil Drops 1% After Recent Rally

Trade oil futures took a step back, declining around 1.0%, driven by profit-taking following a surge to 10-month highs. There’s also growing apprehension about the impact of high interest rates on oil drops.

Brent futures for November delivery, in their penultimate day as the front-month contract, fell by 1.2% to $95.38 a barrel. Meanwhile, Brent December futures dipped approximately 1.3%, settling at $93.10 per barrel. On the US front, West Texas Intermediate crude (WTI) dropped 2.1% to $91.71 per barrel.

Earlier, scarcity in supply and inventory levels pushed Brent’s front-month to $97.69, its highest since November 2022. At the same time, WTI reached a new peak since August 2022 at $95.03.

Edward Moya, senior market analyst at OANDA, emphasized that oil was ripe for a pullback, with energy traders quickly locking in profits after coming a few dollars short of the $100 level.

Interest Rate Jitters and Inflation Concerns in Focus

Some traders are expressing concerns that high oil rig prices might exacerbate inflation, potentially leading central banks, including the US Federal Reserve, to persist with high-interest rates.

High oil prices are currently acting as a driver of bearish sentiment among investors. Analysts from the energy consulting firm Gelber & Associates have pointed out that these elevated oil prices might lead the Federal Reserve to maintain high-interest rates for a longer period than initially anticipated in their efforts to combat inflation.

The US economy has maintained a fairly strong 2.1% growth rate in the second quarter and seems to be gaining momentum, with a robust labour market driving substantial wage gains. Growth projections for the July-September quarter are as high as 4.9%. Still, concerns loom regarding a potential slowdown in the fourth quarter due to the possibility of a US government shutdown on Oct. 1.

Fed officials are closely monitoring the super core price measure after significant interest rate hikes since March 2022.

Crude Inventories and Oil Trading Platform Dynamics

US crude inventories have witnessed substantial declines due to combined cuts of 1.3 million barrels per day by Saudi Arabia and Russia, part of OPEC+.

Cushing, Oklahoma, crude stockpiles, a crucial point for US crude futures, are hovering near historic lows, driven by robust refining and export demand. However, concerns linger about the quality of the remaining oil.

The premium of the WTI front-month over the second month is holding near a 14-month high, signifying a market structure known as backwardation. This occurs when spot prices exceed future prices, discouraging energy firms from storing fuel for future months.

Rising Oil Prices’ Impact on Inflation and Deficits

Rising trading oil prices could potentially impact inflation, as well as fiscal and current account deficits. This could present a challenge in the upcoming monetary policy review of the Reserve Bank of India.

India Ratings and Research anticipates no more oil drops. However, that may very much delay the relief from inflation beyond the current fiscal year. Wholesale inflation is expected to rise, leading to adjustments in the RBI’s inflation forecast.

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