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Oil Prices Slide for Third Consecutive Day Amid Concerns of Prolonged US Interest Rate Hikes

Oil prices dipped by over 1% on Wednesday, marking their third consecutive day of decline. This downward trend is attributed to growing expectations that the Federal Reserve may maintain higher U.S. interest rates for an extended period due to persistent inflation, which could potentially impact fuel consumption in the world’s largest economy.

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The market also reacted to reports indicating an increase in U.S. crude oil and gasoline inventories last week, contrary to expectations of a decline. According to sources citing American Petroleum Institute (API) figures on Tuesday, this unexpected rise contributed to the negative sentiment in the oil market.

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Brent crude futures dropped by $1.03, or 1.2%, to $81.85 a barrel, while U.S. West Texas Intermediate crude (WTI) fell by $1.25, or 1.6%, to $77.41 as of 0802 GMT.

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Tamas Varga of oil broker PVM expressed a pessimistic outlook on the fundamental factors affecting oil prices, noting uncertainty regarding the timing of a potential Fed rate cut.

The weakening of physical crude markets is evident, with the premium of Brent’s first-month contract over the second, known as backwardation, nearing its lowest level since January. This suggests a reduction in concerns about immediate supply shortages.

Federal Reserve policymakers indicated on Tuesday that the central bank should wait for several more months to confirm that inflation is indeed on track to meet its 2% target before considering interest rate cuts. Higher borrowing costs resulting from such rate hikes could dampen economic growth and reduce oil demand.

Investor attention is now focused on the release of minutes from the Fed’s recent policy meeting, as well as the latest official U.S. oil inventory figures from the Energy Information Administration (EIA) later on Wednesday. Analysts will closely scrutinize these updates for insights into the Fed’s stance on inflation and clues about the timing and extent of potential interest rate adjustments.

Meanwhile, in Britain, inflation figures for April showed a smaller-than-expected decline, prompting investors to retract bets on a rate cut next month. This development adds to the complex economic landscape influencing oil market dynamics.

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