Oil futures: Prices slump 3% on de-escalation hopes, US crude stock build

Quantum Commodity Intelligence – Crude oil futures Wednesday were sharply lower on hopes of a de-escalation in Middle East tensions, which in turn was seen eroding the risk premium, while higher US crude stocks also weighed.

Front-month Jun24 ICE Brent futures were trading at $87.43/b (1735 GMT), compared to the day's early high of $90.17/b and Tuesday's settle of $90.02/b.

At the same time, May24 NYMEX WTI was trading at $82.88/b versus Tuesday's settle of $85.36/b, while the more-liquid Jun24 contract was trading at $82.32/b.

Most analysts are still expecting some form of retort from Israel, although pressure from the international community is likely to moderate the response.

"Israel is likely to respond to Iran's attacks at some point, as it has said that such response measures are part of its core deterrence strategy. However, it is worth noting that there were very few casualties from Iran's attack, which may potentially limit the scale of the response," said analysts FGE. "Our base case is that the worst has passed."

But FGE added that a further escalation is not entirely off the cards, noting that any threat to the Straits of Hormuz "would be incredibly bullish for oil" given some 20 million bpd of crude and oil products rely on the narrow waterway between Iran and northern Oman.

Inventories

Markets wobbled after data from the American Petroleum Institute revealed an increase of 4 million barrels in US crude stocks last week, which was slightly above forecasts.

However, the gains in crude were to some extent offset by the 2.5 million barrel fall in gasoline stocks, while distillates eased 427,000 barrels, according to the API industry body.

Weekly EIA figures released Wednesday calculated US commercial crude oil inventories a more modest 2.73 million barrels higher on the week, but still lifting stocks to a fresh 9-month high of 460 million barrels.

Oil markets also turned to the US economy after Federal Reserve Chair Jerome Powell cautioned Tuesday that persistently elevated inflation will likely delay any interest rate cuts until later this year.

"Recent data have clearly not given us greater confidence [but] instead indicate that it's likely to take longer than expected to achieve that confidence," Powell said during a panel discussion at the Wilson Center.

"If higher inflation does persist, we can maintain the current level of (interest rates) for as long as needed," said Powell in comments relayed by the Associated Press.

The comments potentially represent a shift for Powell, who last month told a Senate committee the Fed was "not far" from gaining the confidence it needed to cut rates."

"We now expect only two rate cuts by the Fed this year, the first in July and the second one in December. The possibility is even rising that the Fed will not cut rates at all this year," said Wells Fargo in its latest report.

For Europe, Wells Fargo said it maintains expectations that the first ECB rate cut will occur in June but has ruled out a back-to-back cuts forecast, favouring a more gradual easing of one cut per quarter.