Oil edges down as inflation is expected to impact fuel demand

Oil prices fell on Tuesday, erasing some gains from the previous day, as concerns about a potential global economic slowdown due to central banks’ more aggressive interest rate hikes weighed on the market and softened fuel demand.

Brent crude futures for October delivery dropped 81 cents, or 0.7%, to $104.28 a barrel at 0359 GMT after a 4.1% rise on Monday, the largest increase in over a month. Meanwhile, U.S. West Texas Intermediate crude rose by 17 cents, or 0.18%, to $97.18 a barrel, following a 4.2% increase in the previous session.

Inflation is nearing double-digit levels in many of the world’s largest economies, a rate not seen in almost 50 years. This could lead to more aggressive interest rate hikes by central banks in the United States and Europe, which could slow economic growth and decrease fuel demand.

However, the possibility of tighter supplies limited the decline in oil prices. “Risk appetite has cooled over anticipation that the Federal Reserve would continue to increase interest rates…A pull-back of natural gas prices in Europe also adds uncertainties to the picture of the energy crisis,” said analysts from Haitong Futures.

The head of the International Energy Agency (IEA) said that Russia’s oil output had exceeded expectations after the war in Ukraine, but maintaining production would become more difficult as Western sanctions begin to take effect.

Saudi Arabia, the top producer in the Organization of the Petroleum Exporting Countries (OPEC), recently raised the possibility of production cuts, which could coincide with a boost in supply from Iran should it reach a nuclear deal with the West.

Increase rate of Oil

OPEC+ meets on September 5 to set policy.

The American Petroleum Institute will release data on U.S. crude inventories at 4:30 p.m. EDT (20:30 GMT) on Tuesday, while the Energy Information Administration will release its figures at 10:30 a.m. (14:30 GMT) on Wednesday. A preliminary Reuters poll showed that U.S. crude oil stockpiles likely fell by 6,00,000 barrels, with distillates and gasoline inventories also expected to decline.

According to Reuters’ Clyde Russell, oil-buying in some key markets is weaker than prices would suggest, as China’s imports have declined. He also noted that potential output cuts by OPEC+ may not directly impact prices since the group is already undershooting its targets by a large margin.

Finally, violence in Iraq could threaten the oil production of OPEC’s second-largest member, which could lead to further price increases.

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