Oil futures experienced a 1% decline as traders cashed in their profits after prices reached their highest point in 10 months. Additionally, concerns regarding high interest rates potentially dampening oil demand added to the downward pressure on prices. The November delivery futures for oil fell by 1.2% to settle at $95.38 a barrel, while Brent December futures dropped by approximately 1.3% to settle at $93.10 per barrel. Furthermore, the high price of oil is being seen as a catalyst for bearishness, with investors anticipating that the Federal Reserve will maintain high interest rates in order to combat inflation.
Analysts at energy consulting firm Gelber & Associates noted that the high oil prices may lead the Fed to persist with high rates for longer than planned, with the aim of curbing inflation. While the U.S. economy maintained a solid growth rate of 2.1% in the second quarter, the possibility of a government shutdown at the beginning of October could result in a sharp slowdown in the fourth quarter. The market structure called backwardation, which occurs when spot prices surpass future prices, has led to a 14-month high in the premium of the front-month WTI over the second month. This structure discourages energy companies from storing fuel for future months.
Additionally, falling U.S. crude inventories contributed to the decline in oil prices. Stocks at the Cushing, Oklahoma storage hub, and delivery point for oil futures, reached their lowest level since July 2022. As a result, the storage level at Cushing is expected to continue decreasing, unless there is a sustained further narrowing of the WTI-Brent spread. The narrowing spread between Brent and WTI crude prices has also been influenced by tight prompt U.S. supplies, reinforcing concerns about the quality of the remaining oil. OPEC+ members Saudi Arabia and Russia have made cuts of 1.3 million barrels per day until the end of the year, while Russia has announced a ban on fuel exports until its domestic market stabilizes.