Fading War Risks Push Oil To Biggest Weekly Drop Since February
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(Bloomberg) -- Oil posted its biggest weekly decline since February on signs of easing geopolitical risks in the Middle East, while traders continued to weigh the outlook for interest-rate cuts.
West Texas Intermediate settled near $78 a barrel, the lowest closing price since Mid-March. Hamas is studying a proposal for a temporary cease-fire with Israel and plans to send a delegation to Egypt to continue negotiations. The renewed chance of a pause in the war have decreased the geopolitical risk premium that was baked into crude prices for the past few months.
An unclear interest rate outlook is also pressuring crude as some Federal Reserve officials signal that interest rates may remain elevated for “some time,” which could drag on demand for oil.
Other signs of softening have pervaded the oil market this week, beyond the 6.8% drop for headline prices. Gauges of the futures curve have weakened, indicating supplies are less tight, while options markets appear to have erased the war’s risk premium. Still, crude’s nine-day relative strength index has been trading in overbought territory, which could signal the selloff was overdone.
The result is that prices are down about 10% from a five-month high in mid-April, with the fallout from Iran’s unprecedented attack on Israel still limited and Washington pushing for an end to the conflict in Gaza. A surprise jump in US crude inventories Wednesday drove prices down 3.6% in a day, and there are concerns about demand in top importer China.
The move lower has fueled speculation that OPEC+ will prolong output cuts, with almost 90% of traders and analysts surveyed by Bloomberg predicting the group will extend curbs when it meets June 1.
There’s some potential for disagreement at the gathering, after the United Arab Emirates’ main oil company said it had increased production capacity, which would bolster the key member’s case to pump more crude.
--With assistance from Jordan Fitzgerald.
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