Oil Prices Decline on US Inventory Shock

Oil prices declined in Asian trading on Thursday, continuing their slide following a larger-than-anticipated increase in U.S. inventories, which signaled ample supply in the market. Additionally, signs of a potential recession in Japan raised worries about weakening demand.

On Wednesday, crude prices dropped by more than $1 per barrel following the release of data indicating a significant increase of 12 million barrels in U.S. oil inventories for the week ending February 9. This figure far exceeded expectations, which had forecasted a build of 3.3 million barrels.

The elevated reading was primarily attributed to record-high U.S. production levels, signaling ample oil supply in the world’s largest fuel consumer.

Although gasoline and distillate inventories decreased, this decline was largely attributed to prolonged refinery shutdowns necessitated by maintenance activities. Recent months have seen a weakening in U.S. fuel demand, influenced by adverse weather conditions and escalating economic pressures stemming from high inflation and interest rates.

Brent oil futures for April delivery dropped 0.4% to $81.26 per barrel, while West Texas Intermediate crude futures declined by 0.4% to $76.03 per barrel as of 20:53 ET (01:53 GMT).

The release of weak economic data has heightened concerns about demand

Japan’s gross domestic product (GDP) data revealed that the country unexpectedly slipped into a technical recession in the fourth quarter, marked by ongoing weakness in private consumption.

The fourth-quarter euro zone GDP data, released on Wednesday, indicated that economic activity in the bloc remained largely stagnant after it also experienced a recession in the third quarter.

The weak economic indicators, combined with recent signals suggesting that U.S. interest rates will stay elevated throughout 2024, have contributed to concerns that subdued economic activity could dampen oil demand in the coming months.

The strength of the dollar also exerted pressure on crude prices, as the greenback hovered near three-month highs following data indicating that U.S. inflation remained elevated in January. This situation gives the Federal Reserve additional reasons to maintain higher interest rates for an extended period.

The International Energy Agency is scheduled to publish its monthly report later on Thursday. This release follows closely after the Organization of the Petroleum Exporting Countries (OPEC) maintained its outlook for global crude demand unchanged in its own monthly report.

Oil prices have maintained some gains over the past fortnight, primarily due to ongoing worries about supply disruptions in the Middle East, following the collapse of an Israel-Hamas ceasefire agreement.

A recent Reuters report highlighted that efforts by China, the U.S., and the euro zone to refill depleted sovereign reserves might offer some support to oil prices in the forthcoming months.

The upcoming OPEC meeting in March is now under scrutiny, especially to assess whether the cartel will uphold its production cuts in the short term.

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