Oil down on inflation, supply risks in Mideast, Canada lend floor

Oil down on inflation, supply risks in Mideast, Canada lend floor

By Georgina McCartney

HOUSTON (Reuters) -Oil prices fell on Tuesday, after fresh U.S. data indicated inflation remains sticky, while potential risks to supply from Mideast tensions and wildfires in Canada lent a floor to prices.

Brent crude futures dropped 98 cents to $82.38 a barrel at 01:05 p.m. ET (1705 GMT), while U.S. West Texas Intermediate crude futures (WTI) lost $1.07 to $78.05 a barrel.

U.S. producer prices increased more than expected in April amid strong gains in the costs of services and goods, indicating that inflation remained elevated early in the second quarter.

Borrowing costs in the U.S. have been stuck at high levels since last July as the government aims to quash sticky inflation.

Federal Reserve Chair Jerome Powell said he expects U.S. inflation to continue declining through 2024 but warned his confidence in those decreases has fallen after prices rose more quickly than expected through the first quarter.

“I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year”, Powell said at a banking event in Amsterdam, adding, “I would say my confidence in that is not as high as it was.”

“The inflation story is not under control that is pulling demand back a bit and the thing that rubbed a little salt in the wound was Powell’s comments”, said Tim Snyder, economist at Matador Economics.

U.S. consumer price data, expected on Wednesday, will have a sharper impact on the timing of the much-awaited rate cut, which could spur economic growth and therefore oil demand.

Meanwhile on Tuesday, the Organization of the Petroleum Exporting Countries stuck to its forecast for relatively strong growth in global oil demand in 2024 and said there was a chance the world economy could do better than expected this year.

OPEC’s monthly report said world oil demand will rise by 2.25 million barrels per day (bpd) in 2024 and by 1.85 million bpd in 2025.

Energy markets were also watching wildfires in remote western Canada that could disrupt the country’s oil supply, and in turn buoy prices.

Firefighters on Monday were racing to contain one blaze in British Columbia and two in Alberta near the heart of the country’s oil sands industry.

Canada has a 3.3 million barrel per day (bpd) production capacity, and is a key supplier of heavier crude.

“Spreading wildfires in Alberta oil sands impose downside risks to our constructive Canada production outlook as massive fires in the same region eight years ago triggered a temporary shutdown of over 1 million bpd oil production,” said Goldman Sachs analysts in a note.

Meanwhile, ongoing conflict in the Middle East continues to pose a threat to crude supply, and could be lending a floor to prices as economic concerns apply downward pressure.

Israeli tanks pushed deeper into eastern Rafah on Tuesday, reaching some residential districts of the southern border city where more than a million people had been sheltering.

“Uncertainty over Rafah and the blowback from that is keeping the market on edge as well,” said Phil Flynn, an analyst at Price Futures Group.

(Reporting by Georgina McCartney in Houston; Paul Carsten and Natalie Grover in London and Jeslyn Lerh in Singapore; Additional reporting by Colleen Howe in Beijing; Editing by Marguerita Choy, Alexandra Hudson and Ros Russell)