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Oil Prices Dip on Prospects of Prolonged Higher US Rates and Strengthening Dollar

Oil prices took a tumble by nearly $1 a barrel on Friday, influenced by remarks from U.S. central bank officials hinting at the potential for sustained higher interest rates, a factor that could impede demand from major crude consumers worldwide.

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Brent crude futures settled at $82.79 per barrel, marking a decline of $1.09, or 1.3%. Similarly, U.S. West Texas Intermediate crude settled at $78.26 per barrel, down $1.00, or 1.3%.

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Despite Brent logging a marginal 0.2% loss for the week, WTI managed to record a modest rise of 0.2%.

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Dallas Federal Reserve President Lorie Logan expressed uncertainty on Friday regarding whether current monetary policy was sufficiently tight to curb inflation to the central bank’s targeted 2%.

Traditionally, higher interest rates tend to slow economic activity, potentially weakening oil demand.

Additionally, Atlanta Fed President Raphael Bostic conveyed to Reuters his belief that inflation would likely decelerate under existing monetary policy, possibly allowing the central bank to commence reducing its policy rate in 2024. However, any reductions might be minimal, perhaps by just a quarter of a percentage point and not until the year’s final months.

John Kilduff, a partner at Again Capital, noted, “The two Fed speakers certainly seemed to put the kibosh on the prospect of rate cuts.”

Following the comments from Fed officials, the U.S. dollar strengthened, making commodities priced in greenbacks more expensive for buyers using other currencies. Furthermore, the potential for higher-for-longer U.S. interest rates could further dampen demand.

Jim Ritterbusch of Ritterbusch and Associates highlighted the additional pressure on oil prices stemming from rising U.S. fuel inventories approaching the typically robust summer driving season. He suggested that given the recent price decline and weaker-than-expected demand trends for U.S. gasoline and diesel, some bearish demand adjustments might be on the horizon.

Next week, U.S. inflation data could play a pivotal role in influencing Fed decisions on rates.

Despite energy services firm Baker Hughes reporting a decline in the U.S. oil rig count, an indicator of future supply, oil prices failed to gain support.

Money managers reduced their net long U.S. crude futures and options positions in the week to May 7, according to data from the U.S. Commodity Futures Trading Commission.

While data showing increased oil imports by China in April compared to the same month last year offered some support, conflict in the Middle East and tensions between Ukraine and Russia continued to add to market uncertainty.

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