Oil Prices Increase Due to US Inventory Decline Concerns

By Georgina McCartney

HOUSTON (Reuters) -Oil prices settled lower on Thursday with Yemen's Houthi militia expected to halt attacks on ships in the Red Sea, and investors weighing strong U.S. retail sales data. 

Brent crude futures settled down 74 cents, or 0.9%, at $81.29 per barrel, after rising 2.6% in the previous session to their highest price since July 26. 

U.S. West Texas Intermediate crude futures settled down $1.36, or 1.7%, to $78.68 a barrel, after gaining 3.3% on Wednesday to their highest price since July 19.

U.S. crude futures fell more than $2 at times during the session. 

Maritime security officials said they were expecting the Houthi militia to announce a halt in its attacks on ships in the Red Sea, after a ceasefire deal in the war in Gaza between Israel and the militant Palestinian group Hamas.

The attacks have disrupted global shipping, forcing firms to make longer and more expensive journeys around southern Africa for more than a year.

"The Houthi development and the ceasefire in Gaza help the region stay calmer, taking some of the security premium out of oil prices," said John Kilduff, a partner at Again Capital in New York. 

"It's all about oil flows," Kilduff added. 

But investors remained cautious, as the leader of the Houthis said his group would monitor the implementation of the ceasefire deal, and continue its attacks on vessels or Israel if the deal is breached.

The ceasefire in the Gaza Strip should start on Sunday as planned, despite the need for negotiators to tie up a "loose end," U.S. Secretary of State Antony Blinken said.

Earlier on Thursday, the U.S. Commerce Department reported U.S. retail sales increased in December as households bought more motor vehicles and a range of other goods, pointing to strong demand in the economy.

U.S. crude futures extended losses after investors interpreted the data as bolstering the Federal Reserve's cautious approach to cutting interest rates this year.

But prices regained some ground after Fed Governor Christopher Waller said inflation is likely to continue to ease and possibly allow the U.S. central bank to cut interest rates sooner and faster than expected. 

   "Waller's comments really offset the economic data this morning, in terms of making it look like there is room for the Fed to cut," Again Capital's Kilduff said.  

Lower interest rates can stimulate economic growth and increase oil demand.

NEW SANCTIONS ON RUSSIA

Investors also continued to weigh the Biden administration's latest round of sanctions targeting Russia's military industrial base and sanctions-evasion efforts, after earlier levying broader sanctions on Russian oil producers and tankers. Moscow's top customers are now scouring the globe for replacement barrels, while shipping rates also have surged. 

With U.S. President-elect Donald Trump being sworn in for his second term on Monday, "the market is approaching the 'wait-and-see' phase and awaits the reaction from the incoming U.S. administration on the issue" of sanctions, said Tamas Varga at oil broker PVM.

Pricier oil may lead to clashes between Trump and the Organization of the Petroleum Exporting Countries, if the incoming U.S. president follows his previous playbook. 

During his first term, Trump demanded the producer group rein in prices whenever Brent climbed to around $80 a barrel.

OPEC and its allies, collectively known as OPEC+, have been curtailing output over the past two years and are likely to be cautious about increasing supply despite the recent price rally, said Rory Johnston, the founder of Commodity Context. 

"The producer group has had its optimism dashed so frequently over the past year that it is likely to err on the side of caution before beginning the cut-easing process," Johnston said.

(Reporting by Georgina McCartney in Houston, Paul Carsten in London, Siyi Liu in Singapore and Shariq Khan in New York; Editing by Elaine Hardcastle, Emelia Sithole-Matarise, David Evans, Paul Simao and Rod Nickel)