Oil prices moved lower on Wednesday even as Middle East supply risks remained high. Brent crude futures fell 1.1% to $107.55 a barrel. West Texas Intermediate (WTI) crude fell 1.6% to $104.11 a barrel.
Despite Wednesday’s fall, both oil benchmarks remained close to four-month highs.
On Tuesday, Brent and WTI had settled at their highest levels since May 19, showing that oil prices are still elevated despite the latest pullback. The Fed is widely expected to raise its benchmark interest rate for the first time since 2023. The 750-mile East-West Pipeline can transport as much as 7 million barrels of oil a day to the Red Sea port of Yanbu. The International Maritime Organization had recorded 80 confirmed maritime incidents in the Strait of Hormuz and the wider Middle East since the conflict began. The figure was recorded as of September 15.
Because borrowing becomes more expensive for consumers and businesses, higher interest rates can slow economic activity. Because the Middle East is a major source of global oil exports, the risks are especially important. Because it gives Saudi Arabia another export route when shipments through the Strait of Hormuz face problems, this pipeline is important. European refiners are therefore having to look for replacement cargoes.
The biggest reason for the fall is the Federal Reserve’s interest-rate decision. The US Federal Reserve is set to announce its interest-rate decision later Wednesday after a two-day policy meeting. A weaker economy can reduce fuel consumption and, in turn, lower demand for crude oil. Ongoing disruptions in the region and advances by Iran-backed Houthi militants continue to threaten crude supply and shipping routes. Any major disruption to exports could quickly tighten global crude supplies and push prices higher. Drone attacks forced Saudi Arabia to shut down parts of the pipeline . Saudi Arabia is now trying to resume partial operations within days. Saudi Arabian Oil Co., better known as Aramco, is reportedly delaying some shipments to European customers after the pipeline attacks. The Strait of Hormuz is one of the world’s most important oil shipping routes.
This is putting pressure on oil prices even though there are still serious supply risks in the Middle East, according to The Wall Street Journal. However, damaged pumping stations could take six to eight weeks to fully repair, according to The Wall Street Journal. UOB Global Economics & Markets Research highlighted the shipment delays in a research note, according to The Wall Street Journal. Earlier reporting noted: With the pipeline out of service, the Red Sea port of Yanbu will have to draw on storage, which is estimated to cover five to seven days of exports, according to three industry sources. Earlier reporting noted: “The relatively contained price reaction suggests the market still expects Saudi inventories to cushion exports in the near term, but if the disruption extends beyond the five-to-seven-day inventory cushion, that could change quickly,” said Janiv Shah, oil markets analyst at Rystad.
Oil is traded globally in US dollars. When the dollar becomes stronger, crude oil becomes more expensive for buyers using other currencies. This can reduce demand and put downward pressure on oil prices. Oil prices also came under pressure from elevated US Treasury yields, adding to the market’s focus on tighter financial conditions. This helped reduce some immediate concerns about tight oil supplies. One major replacement source is Norway’s Johan Sverdrup crude. Johan Sverdrup is relatively close to European refineries compared with crude shipped from the Middle East. Refiners are increasingly using it as a replacement for Middle Eastern barrels . The decline is mainly coming from financial and demand concerns, rather than the Middle East risks disappearing. The expected Fed rate hike could slow economic activity and oil demand. A stronger US dollar makes dollar-priced crude more expensive for international buyers, while higher Treasury yields are also putting pressure on markets. At the same time, Middle East attacks, shipping disruptions and delayed Saudi cargoes are keeping the longer-term supply outlook tight.
Data from the American Petroleum Institute (API) showed that US crude inventories increased by 7.1 million barrels last week. Johan Sverdrup crude jumped $7.265 a barrel on Tuesday. It reached a record premium of $19.55 a barrel over Dated Brent, according to S&P Global Commodity Insights. The 7.1-million-barrel rise in US crude inventories has also eased some immediate supply worries.
The combination of a stronger dollar and high Treasury yields is therefore limiting oil’s gains. Because some Middle Eastern crude shipments have been delayed, european refiners are looking for alternatives.
MUFG’s Soojin Kim said the inventory increase helped ease some of the near-term supply concerns, according to The Wall Street Journal. Johan Sverdrup is a medium-sour crude that is similar in quality to some Middle Eastern oil grades, according to The Wall Street Journal. Shipping risks around the Strait of Hormuz, stronger Asian demand and delays in Middle East cargoes are all tightening supplies of sour crude in Europe, according to S&P Global Commodity Insights.
A rise in inventories means there was more crude available in the US than previously expected.
