Oil Prices Decline as Economic Concerns Trump Tight Supplies

by Jennifer

Oil prices saw a slight decline on Wednesday, continuing a sharp drop following a series of weak economic indicators that have raised concerns about demand, despite reports of sustained reductions in U.S. inventories.

The potential for a de-escalation in the Israel-Hamas conflict has also contributed to dampening concerns that the ongoing turmoil would disrupt Middle Eastern oil supplies, with reports indicating that Israel had postponed a planned ground assault on Gaza.

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On Tuesday, crude prices experienced a 2% drop, primarily due to discouraging economic data from the Eurozone, indicating deteriorating economic conditions in the region, which could, in turn, impact oil demand.

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Despite positive Purchasing Managers’ Index (PMI) readings from the United States, other data also suggested that U.S. inventories likely continued to shrink in the past week.

At 20:58 ET (00:58 GMT), Brent oil futures were down by 0.1% to $87.98 per barrel, while West Texas Intermediate crude futures registered a 0.2% decrease, settling at $83.56 per barrel. Both contracts were in close proximity to a two-week low.

Unexpected Decline in U.S. Inventories According to API

Data released by the American Petroleum Institute (API) revealed that U.S. inventories decreased by over 2 million barrels in the week ending on October 20, contrary to expectations of a 1.6 million-barrel increase. This suggests that robust exports and strong domestic fuel consumption have maintained tight supplies in the U.S., with fuel demand remaining robust even after the conclusion of the summer season.

API data typically foreshadows a similar trend in government inventory data, which is anticipated to be released later on Wednesday. The inventory reduction occurs in the context of tightening global supplies, stemming from significant supply cuts by Saudi Arabia and Russia earlier in the year.

This inventory data came after strong PMI readings that indicated unexpected growth in both U.S. manufacturing and services activities in October, albeit at a somewhat sluggish pace.

Nonetheless, the strengthened U.S. dollar, influenced by the improved data, has also weighed on oil prices. A stronger dollar makes U.S. crude more expensive for international buyers.

European Recession Concerns Impact Oil Markets

The primary source of anxiety in oil markets this week has been the weak PMI data from the Eurozone, released on Tuesday. Traders are concerned that a recession in the region could dent oil demand, especially as Germany, the largest economy in the region, is already in a recession, with the latest reading showing no signs of improvement.

This weak data arrives just days before a European Central Bank meeting, where it is widely expected that the bank will maintain interest rates at their current levels.

In addition to the European Central Bank, markets are also on edge regarding a Federal Reserve meeting scheduled for the following week.

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