Crude oil prices edged lower on Tuesday, influenced by a stronger dollar and the market's focus shifting towards upcoming U.S. inflation data. Despite the dip, escalating geopolitical tensions and expectations of increased summer demand helped limit the losses.
Brent futures for August delivery fell by 20 cents, or 0.2%, settling at $85.81 per barrel by 1319 GMT. Similarly, U.S. crude futures declined by 19 cents, or 0.2%, to $81.44 per barrel. Both benchmarks had previously gained about 3% over the past week, marking two consecutive weeks of increases.
The dollar's rise by 0.13% on Tuesday made dollar-priced oil more expensive for buyers using other currencies. Concurrently, the U.S. Federal Reserve has indicated that maintaining the current policy rate for a while could be sufficient to control inflation, which could potentially hold back economic growth and limit fuel consumption.
"Positive news around U.S. inventories and gasoline demand last week have increased positive sentiment, bolstered with forecasts of a global supply shortfall in the third quarter," said Ashley Kelty, an analyst at Panmure Gordon. However, she noted that the slow pace of central bank rate cuts remains a headwind to global economic recovery.
An anticipated decline in oil and fuel stockpiles, along with stronger gasoline demand as the U.S. enters its peak summer consumption period, has helped keep a lid on price losses. A preliminary Reuters poll suggested that U.S. crude oil stockpiles likely fell by 3 million barrels in the week ending June 21, with gasoline stocks also expected to have declined while distillate inventories probably rose.
"The surge in oil prices was triggered by an optimistic demand outlook and reduced U.S. inventories. With the Northern Hemisphere entering a hot summer and the upcoming hurricane season, demand is expected to continue increasing in the coming months," said independent market analyst Tina Teng.
Market participants are also keeping an eye on the release of the personal consumption expenditures index on Friday, the U.S. Federal Reserve's preferred inflation measure, which will provide further insight into the central bank's potential timeline for reducing interest rates.
Geopolitical factors also played a role in supporting oil prices. Continued Ukrainian attacks on Russian oil infrastructure, including strikes on four refineries on June 21, have contributed to market concerns about supply disruptions.
Meanwhile, traders are monitoring tensions on the Israel-Lebanon border. U.S. crude oil and global benchmark Brent have shown significant gains for the month, buoyed by a more optimistic outlook for summer fuel demand.
Air Force General Charles Q. Brown, the top U.S. military officer, warned that Iran, an OPEC member, might support Hezbollah if Israel launched an offensive in Lebanon. Oil prices had previously hit annual highs in April as tensions between Israel and Iran raised fears of a wider conflict that could disrupt crude supplies.
"Oil markets have so far been immune to the fallout of the Gaza invasion," said John Evans, an analyst at oil broker PVM, in a note to clients. However, he cautioned that the expectation of higher oil prices might not fully account for the broader implications of the conflict.
Brent prices above $85 per barrel could signal more upward pressure as geopolitical risks and bullish fundamentals converge, according to Claudio Galimberti, director of global market analysis at Rystad Energy.
The U.S. Department of Energy is set to release official data on oil stockpiles on Wednesday, with analysts expecting a significant crude oil draw. Ryan McKay, a senior commodity strategist at TD Securities, noted that supply risks are back in focus due to tensions in the Middle East and concerns over ship attacks in the Red Sea.
However, McKay warned that the oil rally could lose momentum if West Texas Intermediate (WTI) prices fall below $81 per barrel, potentially prompting funds to start liquidating long positions.
