By Georgina McCartney
HOUSTON (Reuters) -Oil prices settled 1% lower on Tuesday as lingering U.S. inflation poised to keep interest rates higher for longer and likely weighed on consumer demand at the pump, while little support came from geopolitical risk.
Brent crude futures settled down 83 cents, or 1%, to $82.88 a barrel. U.S. West Texas Intermediate crude (WTI) futures for June, which expire on Tuesday, slipped by 54 cents, or 0.7%, to $79.26.
The more active July contract settled down 64 cents, at $78.66.
Higher borrowing costs tie up funds in a blow to economic growth and demand for crude, as well as pressuring consumer demand at the pump.
“The market is very focused on gasoline demand in the U.S. because there are signs that consumers are cutting back because of inflation. Unless that turns around, the market is suggesting things could be a little bleak,” said Phil Flynn, an analyst at Price Futures Group.
Despite the run up to this weekend’s Memorial Day holiday, which kicks off the U.S. peak summer driving season, retail gasoline prices fell for the fourth consecutive week to $3.58 per gallon on Monday, the Energy Information Administration (EIA) said in its gasoline and diesel fuel update.
However, in a bid to ensure sufficient supply flows to the northeast, the U.S. will sell the nearly 1 million barrels of gasoline in a reserve in northeastern states, with bids due on May 28, the Department of Energy said on Tuesday.
U.S. diesel prices have also slipped, EIA data show, down 5.9 cents on the week on Monday, at $3.89 per gallon. Diesel is a key refined product for both the industrial sector and transport.
Investors are awaiting minutes from the Fed’s last policy meeting due on Wednesday, as well as weekly U.S. oil inventory data. Industry oil data is due at 4:30 p.m. ET (2030 GMT) on Tuesday, followed by the EIA’s report on Wednesday.
“There is nothing in the market right now that is pushing prices higher. If we see a little bit of a stock draw tomorrow that may help push prices back up into the $78.50-$80 per barrel range,” said Tim Snyder, economist at Matador Economics.
Meanwhile, Fed officials’ comments pointed to interest rates staying higher for longer than markets previously expected.
Two Federal Reserve policymakers on Tuesday said it was prudent for the U.S. central bank to wait several more months to ensure that inflation really is back on a path to the 2% target before commencing interest rate cuts.
But the economic outlook in Europe is more positive, potentially providing a floor to oil prices on Tuesday.
European Central Bank President Christine Lagarde says she is “really confident” that euro zone inflation is under control as the impact of the energy crisis and supply-chain bottlenecks fades away, speaking in an interview aired on Tuesday.
The ECB has all but promised a rate cut on June 6, so policymakers have shifted their attention to debating where rates will go thereafter.
On the supply side, a fading geopolitical risk premium from the war in Gaza failed to provide much support.
The market also appeared largely unaffected by the death of Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, in a helicopter crash on Sunday.
“I think the market has taken away some of the risk premium because it seems even though Israel is continuing in Rafah, this is not impacting supply or demand,” said Phil Flynn, analyst at Price Futures Group, adding that the market does not expect any changes in Iranian oil policy after the president’s death.
The structure of the Brent contract is weakening in an indication of a softer market and strong supply.
The front-month Brent contract’s premium to the second-month contract narrowed to 10 cents, its weakest since January.
(Reporting by Georgina McCartney in Houston, Noah BrowningAdditional reporting by Deep Vakil in Bengaluru, Yuka Obayashi in Tokyo and Trixie Yap in SingaporeEditing by David Goodman, Marguerita Choy, Bill Berkrot and Kevin Liffey)
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