Oil prices dipped slightly on Wednesday as signs of rising U.S. stockpiles countered concerns about escalating tensions in the Middle East. Benchmark crude prices, including Brent and West Texas Intermediate (WTI), pared earlier losses after a two-day gain driven by worries that a regional conflict could disrupt global supplies.
Brent crude traded near $73 per barrel, while WTI slipped just below $71. Data from the American Petroleum Institute (API) indicated that U.S. crude inventories had increased by nearly 2 million barrels last week. Gasoline and distillate stocks also expanded, according to individuals familiar with the report. This inventory buildup has eased some of the market's immediate concerns over supply, even as geopolitical tensions remain high.
A crucial factor influencing oil prices is the ongoing anticipation of the Federal Reserve's upcoming decision on interest rates. While investors widely expect the Fed to cut rates, many analysts believe the potential boost to oil prices may already be priced in. Matt Smith, lead oil analyst at Kpler, noted that "in theory, a rate cut is supportive for oil prices," but added that the market's recent rallies likely reflect this expectation. "Hence, the response may be muted," he said.
The U.S. oil market has been volatile in recent months, driven by a growing imbalance between supply and demand. As of Wednesday, the U.S. benchmark WTI had fallen by about 13% in the third quarter, while global benchmark Brent had dropped by 15%. Year to date, WTI is down around 1%, while Brent has declined more than 4%.
Several factors are contributing to this downward trend. China, the world's largest importer of crude, has seen slower consumption due to a surge in electric vehicle sales and ongoing economic challenges. Meanwhile, some European refineries have been reducing processing rates in response to lackluster demand. In contrast, oil production remains robust in the U.S., Canada, Brazil, and Guyana, adding to concerns about a potential oversupply.
OPEC+ is expected to gradually restore output later this year, but analysts remain cautious about the potential impact on prices. The group's strategy of maintaining supply discipline has helped stabilize prices over the past year, but as output from non-OPEC producers continues to grow, the market may face additional pressure.
Manish Raj, managing director of Velandera Energy Partners, emphasized that while a rate cut from the Fed might be seen as supportive for oil, it is unlikely to significantly boost demand. "The Fed action is unlikely to suddenly spur demand, which has otherwise been soft," Raj said, adding, "nobody is hitting the gas stations just because the Fed decides to cut the rates today."
Andy Lipow, president of Lipow Oil Associates, shared a similar sentiment, suggesting that the oil market has already priced in a modest quarter-point rate cut. However, he noted that "a 50-basis-point cut is slightly supportive of the oil market since it translates into a weaker dollar and stronger prices for dollar-denominated commodities."
Amid these economic uncertainties, geopolitical tensions in the Middle East have added another layer of complexity to the market. On Tuesday, hundreds of explosive-laden pagers targeted Hezbollah militia members in Lebanon, heightening concerns about a potential broader conflict between Israel and Iran-backed Hezbollah. The attack, which caused multiple casualties and widespread injuries, has raised fears of an all-out war in the region, a development that could severely disrupt oil flows and further complicate the global energy market.
While these tensions have provided some short-term support to oil prices, the broader trend of weak demand and rising supply continues to weigh on the market. Traders are also closely monitoring U.S. crude oil inventory data, which is expected to be released later on Wednesday, as any significant changes could impact prices further.
