Oil prices moved lower on Wednesday, ending a three-session rally as traders assessed uncertainty surrounding the fragile ceasefire situation in the Middle East and awaited upcoming talks in China between U.S. President Donald Trump and Chinese President Xi Jinping.
Brent crude futures declined by $1.47, or 1.4%, to $106.30 per barrel by 0630 GMT. U.S. West Texas Intermediate crude futures also fell $1.41, or 1.4%, to $100.77 per barrel.
Both oil benchmarks have largely traded around or above the $100-per-barrel threshold since the United States and Israel launched attacks on Iran at the end of February and Tehran effectively closed the Strait of Hormuz.
Supply concerns continue to support crude markets
Analysts said concerns over global energy supplies continue to underpin prices despite the latest pullback.
“Concerns over supply disruptions and uncertainty surrounding the Middle East are keeping oil prices well supported, even as traders struggle to establish a clear direction,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.
“The market remains highly reactive to every update from the region, meaning sharp swings are likely to persist. Any further escalation or direct threat to supply flows could quickly revive strong upside momentum in both Brent and WTI,” added Sachdeva.
Oil prices had climbed more than 3% on Tuesday, extending earlier gains after hopes for a lasting ceasefire agreement between the United States and Iran weakened further, reducing expectations that the Strait of Hormuz could soon reopen. Roughly one-fifth of global oil and liquefied natural gas flows normally pass through the strategic waterway.
Trump heads to China as Iran tensions persist
Trump said on Tuesday that he did not believe China’s assistance would be necessary to end the conflict with Iran, even as prospects for a durable peace agreement continued to fade and Tehran tightened control over the Strait of Hormuz.
China remains the largest buyer of Iranian crude oil despite sanctions imposed by the Trump administration. Trump is scheduled to meet Xi Jinping in Beijing on Thursday and Friday.
In a note to clients, analysts at Eurasia Group said: “The length of the disruption and the scale of the supply loss – already more than 1 billion barrels – means oil prices are likely to remain above $80 per barrel for the rest of the year.”
Rising energy costs add pressure to the U.S. economy
The conflict with Iran has increasingly affected the U.S. economy, as elevated crude prices translate into higher fuel costs for consumers and businesses. Economists expect broader secondary effects to emerge over the coming months.
Data released in April showed that U.S. consumer prices rose sharply for a second consecutive month, producing the largest annual increase in inflation in almost three years. The figures strengthened expectations that the Federal Reserve could leave interest rates unchanged for an extended period.
“The marked increase in inflation across advanced economies has yet to cause real spending to contract, but the widespread decline in consumer sentiment and hiring intentions points to worse to come,” analysts at Capital Economics said in a client note.
Higher interest rates generally increase borrowing costs, which can ultimately weigh on economic activity and reduce demand for oil.
U.S. crude inventories continue to decline
As the conflict involving Iran continues, U.S. crude oil stockpiles fell for a fourth consecutive week last week, while inventories of distillate fuels also declined, according to market sources citing data from the American Petroleum Institute.