Oil prices slipped on Tuesday after rallying more than 4% in the previous session, as investors took profits and watched for potential supply disruptions amid military clashes between Israel and the Palestinian Islamist group Hamas. But market participants were also wary of the implications for global growth and inflation, which have been a critical driver of the months-long oil price surge.
Central banks in the United States and Europe have boosted interest rates to control inflation, driving consumer prices. A further rise in oil prices could reinforce that trend, undermining the progress made by policymakers to tame soaring consumer prices.
Oil traders were also eyeing the release of weekly U.S. government data on crude inventories. The Energy Information Administration is expected to show that U.S. crude supplies fell last week. Still, the decline is likely smaller than analysts predicted in a Reuters poll. The decline in inventory is expected to keep upward pressure on oil prices.
Adding to the volatility was a surprisingly dovish tone from a top U.S. central bank official. On Monday, Federal Reserve Chair Janet Yellen said that a recent rally in oil prices was “unsustainable.” Yellen added that it would be appropriate to “monitor the impact of the recent increase in oil prices on global economic activity and inflation.”
The dovish remarks helped drive a retreat from equities, which had been rising along with crude. The S&P 500 dipped by 0.27%, and the tech-heavy Nasdaq index fell 0.35%.
Investors weighed the risks of a possible escalation in the Middle East conflict against the risk that higher inflation will slow global economic growth and thwart central banks’ efforts to tame consumer prices. Markets also refocused on weaker-than-expected Chinese economic data, which weighed on investors’ expectations for a recovery in the world’s biggest oil consumer.
Saudi Arabia and Russia moved to support oil prices by extending their voluntary production cuts through the end of the year. The two countries have cut output by about 1 million barrels per day (bpd). Brent crude futures fell 36 cents to $87.79 a barrel, while U.S. West Texas Intermediate crude eased 35 cents to $86.03 a barrel. Both benchmarks had fallen by more than $1 in earlier trading before rebounding slightly. The dollar rose against the euro and yen, making oil more expensive for holders of those currencies. This weighed on demand. The number of operating oil rigs in the United States fell by 8 to 507, its lowest level since February 2022. The drop in the rig count further weighed on prices. The number of new rigs on the market in the past week was also lower than forecast. This reflects a continuing slowdown in the U.S. shale industry. The rig count has now fallen by 89 in the past six weeks. It is the first time since April that a rig count has fallen for three consecutive weeks.
