Oil prices saw a modest recovery on Thursday, regaining some ground after three consecutive days of losses. This rebound comes despite ongoing concerns about the potential for further interest rate hikes by the U.S. Federal Reserve, which could dampen oil demand.

By midday, Brent crude futures had risen 51 cents, or 0.6%, to $82.41 per barrel, while U.S. West Texas Intermediate (WTI) crude futures also increased by 51 cents, or 0.7%, to $78.08 per barrel. The gains followed a more than 1% decline on Wednesday, marking the third straight day of falling prices.

The slight uptick in oil prices occurred against a backdrop of apprehensions about the Fed's monetary policy. Minutes from the central bank's most recent policy meeting revealed discussions about potentially raising interest rates further if inflation persists. "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate," the minutes stated.

Higher interest rates typically lead to increased borrowing costs, which can constrain economic growth and, consequently, reduce oil demand in the United States, the world's largest oil consumer. Adding to the market's concerns, U.S. crude stocks rose by 1.8 million barrels last week, contrary to the anticipated draw of 2.5 million barrels, according to the Energy Information Administration.

Global oil markets have also faced pressure from weaker refinery demand and ample supply. Citi analysts noted in a Thursday report, "Recent market softness has come on the back of weaker data, including rising oil inventories, tepid demand, and refinery margin weakness, and the increasing risk of run cuts."

In the global context, Russia reported exceeding its OPEC+ production quota in April due to "technical reasons" and announced plans to present a compensation strategy to the OPEC Secretariat. The OPEC+ group, which includes OPEC members and allies led by Russia, is scheduled to meet on June 1 to discuss production cut levels. John Evans of oil broker PVM suggested that while tightening the market further in June's meeting may be challenging, maintaining current voluntary cuts could still be beneficial in the long term.

Further compounding the market's cautious outlook, official data revealed an unexpected build in U.S. oil inventories for the week ending May 17. Distillate inventories also increased, and gasoline inventories experienced a smaller-than-expected drawdown. This data set a negative tone ahead of the Memorial Day weekend, which traditionally signals the start of the travel-heavy summer season expected to boost demand.

However, persistent inflation, cooling retail spending, and high interest rates are anticipated to potentially dampen U.S. fuel demand this year. The market remains jittery about the possibility of prolonged high U.S. interest rates, which could significantly slow global economic activity in 2024 and, by extension, pressure oil demand.

Supply-side dynamics also remain a critical focus, with the upcoming OPEC+ meeting in early June poised to influence market sentiment. Analysts are closely watching whether the cartel will extend its current production cuts amid fluctuating demand signals and geopolitical uncertainties.

Adding to the mixed market signals, China's recent stimulus measures have yet to fully convince traders of a sustained increase in demand from one of the world's largest oil importers. The cooling optimism surrounding China's economic stimulus initiatives has also contributed to the market's volatility.

In response to these complex dynamics, Marine Corps Lt. Gen. Stephen Sklenka, deputy commander of the U.S. Indo-Pacific Command, emphasized the need for regional cooperation in addressing China's growing influence and the potential implications for global oil markets. Speaking at the National Press Club of Australia, Sklenka urged Asia-Pacific nations to publicly condemn destabilizing actions that could impact regional stability and economic security.