Crude oil extends decline despite geopolitical tensions; 4 key reasons weighing on prices

Crude oil prices extended decline on Tuesday with the global benchmark Brent oil falling over a percent. In the domestic market too, crude oil prices traded lower.

The fall in crude oil prices comes despite the ongoing geopolitical tensions and ahead of the meeting of the Organization of the Petroleum Exporting Countries and its affiliates, together known as OPEC+ on supply. Both benchmarks fell less than 1% on Monday.

While there were more Ukrainian drone attacks on Russian refineries, another Houthi strike was reported against a tanker in the Red Sea over the weekend. Moreover, tensions in the Middle East also escalated after the recent death of Iran’s President Ebrahim Raisi in a helicopter crash.

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However, Brent crude oil was trading 0.92% lower at $82.94 a barrel, while the US West Texas Intermediate (WTI) crude futures was down 0.80% to $79.16 per barrel. MCX crude oil prices fell 0.41% to ₹6,552.

Traders are looking ahead towards the meeting of the cartel OPEC in early June that will set the group’s supply policy for the second half.

“NYMEX crude oil is expected to slip towards $78 levels on strong dollar and on concerns that the US Federal Reserve would keep its borrowing cost higher for longer, hurting economic growth and demand for oil. Meanwhile, investors will keep an eye on political uncertainty in two major oil producing countries after Iran’s president died in a helicopter crash and Saudi Arabia’s crown prince deferred a trip to Japan because of the health of the King,” ICICI Direct said in a note.

It expects MCX crude oil June contract to slip towards ₹6,450 levels as long as it trades below ₹6,700 levels. 

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Here are the key reasons why crude oil prices are falling:

US Interest Rates

US Federal Reserve officials said they were awaiting more signs of slowing inflation before considering interest rate cuts. Thus, investors anticipate that the central bank will keep interest rates higher longer than expected. The higher interest rates and inflation continued to weigh on consumer and industrial demand, pressurising crude oil prices.

Middle East

Analysts believe the death of Iranian President Raisi would not impact the crude market as Iran’s Supreme Leader Ayatollah Ali Khamenei has assured there won’t be any disruption to the country’s affairs. 

OPEC+ Meeting

Investors stayed on the sidelines ahead of the OPEC+ meeting scheduled on June 1 to set output policy. The oil cartel will decide whether to extend some members’ 2.2 million barrels per day of voluntary cuts.

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High Supply

Supply chains are at risk of being overrun by production that outpaces overall demand. Crude oil traders are closely monitoring this week’s crude oil stocks updates to assess the potential supply overhang

“Refineries’ anticipated increase in crude oil markets has not materialized, risking supply chain overrun by production outpacing demand. Moreover, spring maintenance in 2024 caused a significant number of refineries to go offline, leading to lower-than-expected crude oil demand, said Ajay Kedia, Director, Kedia Advisory.

Meanwhile, traders will also be watchful of the key US PMI data on Thursday. Analysts expect weak data could potentially weigh on crude oil prices, while strong figures may provide a boost.

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