Oil Prices Drop on Uncertain Iran Ceasefire and Trump's Trip to China
Market Reactions and Economic Impacts
By Katya Golubkova
Oil Price Movements and Geopolitical Factors
TOKYO, May 13 (Reuters) - Oil prices fell on Wednesday after rising in three consecutive sessions, as investors awaited developments around the fragile ceasefire in the Iran war and U.S. President Donald Trump headed to China for a high stakes summit with President Xi Jinping.
Brent and WTI Futures
Brent crude futures lost 82 cents, or 0.76%, to trade at $106.95 a barrel at 0051 GMT, and U.S. West Texas Intermediate futures fell 66 cents, or 0.65%, to $101.52.
Both benchmarks have largely hovered around or above the $100 per barrel mark since the U.S. and Israel began attacks on Iran at the end of February and Tehran effectively shut the Strait of Hormuz.
Ceasefire Hopes and Strait of Hormuz
Oil prices rose by over 3% on Tuesday, extending earlier gains as hopes for the lasting U.S.-Iran ceasefire faded, dimming prospects of re-opening the strait, through which about a fifth of global oil and liquefied natural gas normally flows.
Diplomatic Developments and China’s Role
Trump’s Statements and Beijing Summit
Trump said on Tuesday he does not think he will need China's help to end the war with Iran, even as hopes for a lasting peace deal dwindled and Tehran tightened its grip over the strait.
China’s Oil Imports from Iran
China is the biggest buyer of Iranian oil despite pressure from the Trump administration. Trump meets his Chinese counterpart Xi in Beijing on Thursday and Friday.
Economic Consequences of the Iran Conflict
Oil Supply Disruption and Price Outlook
"The length of the disruption and the scale of the supply loss - already more than 1 billion barrels - means oil prices are likely to remain above $80 per barrel for the rest of the year," Eurasia Group said in a client note.
Impact on U.S. Economy and Inflation
The war with Iran has started to take its toll on the U.S. economy, the world's biggest, as higher oil prices lead to more expensive fuels, and economists expect to see second-round effects in the months ahead.
Inflation and Federal Reserve Policy
In April, U.S. consumer prices rose sharply for a second straight month, resulting in the largest annual increase in inflation in nearly three years, bolstering expectations that the Federal Reserve would keep interest rates flat for a while.
"The marked increase in inflation across advanced economies has yet to cause real spending to contract, but the widespread decline in consumer sentiment and hiring intentions points to worse to come," the Capital Economics said in a client note.
Elevated interest rates make borrowings more expensive, potentially denting demand for oil.
U.S. Oil Inventories and Market Data
Inventory Trends
As the Iran war continues, U.S. crude oil inventories fell for a fourth straight week last week and distillate inventories also declined, according to market sources citing American Petroleum Institute data.
Upcoming Official Data
Official inventory data from the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, are due at 10:30 a.m. ET (1430 GMT) on Wednesday, with a Reuters poll also predicting a decline in stockpiles.
(Reporting by Katya Golubkova in Tokyo; Editing by Sonali Paul)
