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Oil Prices Decline on Fears of High U.S. Interest Rates Depressing Demand

Oil prices fell in early Asian trade on Tuesday as investors anticipated that persistent U.S. inflation and higher interest rates could dampen consumer and industrial demand.

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Brent crude futures decreased by 44 cents, or 0.53%, to $83.27 a barrel by 0313 GMT. Similarly, U.S. West Texas Intermediate crude (WTI) dropped 51 cents, or 0.64%, to $79.29 a barrel.

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Both benchmarks saw less than a 1% decline on Monday following comments from U.S. Federal Reserve officials who indicated they were waiting for more definitive signs of slowing inflation before considering interest rate cuts.

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Fears of weaker demand led to selling as the prospect of a Fed rate cut became more distant,” explained Toshitaka Tazawa, an analyst at Fujitomi Securities.

On Monday, Fed Vice Chair Philip Jefferson stated it was too early to determine if the inflation slowdown is “long-lasting,” while Vice Chair Michael Barr emphasized that restrictive policy needs more time. Additionally, Atlanta Fed President Raphael Bostic noted it would “take a while” for the central bank to be confident in the sustainability of a price growth slowdown.

Lower interest rates typically reduce borrowing costs, potentially boosting economic growth and demand for oil. However, the prospect of continued high rates has raised concerns about weaker demand.

The market showed little reaction to political uncertainty in two major oil-producing countries.

“While there has been some upward movement due to uncertainty in Iran, prices have since pared back some gains as investors price for the status quo in terms of policies, with any wider regional conflict remaining off the table,” said IG market strategist Yeap Jun Rong in an email to Reuters.

Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, was killed in a helicopter crash. Meanwhile, Saudi Arabia’s Crown Prince Mohammed Bin Salman postponed a trip to Japan due to his father’s health issues.

The death of the Iranian President and the Saudi king’s health issue don’t seem to be affecting the market much, as it is unclear whether they will have an immediate impact on energy policy,” added Fujitomi’s Tazawa.

Investors are focusing on the supply from the Organization of the Petroleum Exporting Countries and its affiliates, known as OPEC+. The group is scheduled to meet on June 1 to discuss output policy, including whether to extend some members’ 2.2 million barrels per day of voluntary cuts.

“Prices remain in wait for a catalyst to drive a breakout of the current range, with eyes still on any geopolitical developments, along with oil inventories data this week,” said Yeap.

OPEC+ may extend some voluntary output cuts if demand does not pick up, according to sources familiar with the matter.

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