Oil Prices Set for a Weekly Decline as Futures Market Swings Into Contango

Crude oil prices extended a two-day decline into the last trading day of the week pressured by Fed comments on rate cuts and the futures market swinging into contango for the first time since the start of the year, suggesting oversupply.

Brent crude fell from over $84 per barrel earlier this week to below $82 earlier today while West Texas Intermediate fell below $78 per barrel.

The latest slide in prices followed comments made by the president of the Dallas Fed, Lorie Logan, who said on Thursday “It's really important that we don't lock into any particular path for monetary policy. I think it's too soon to really be thinking about rate cuts.”

Logan’s comments echoed others, made by the president of the New York Fed, who said, also on Thursday, that current monetary policy was working as intended but the central U.S. bank had not yet gotten to the point where it could start cutting rates since the economy was performing so well.

Rate cuts are considered a major booster for oil demand among traders of the commodity and the absence of intentions to implement some in the world’s largest consumer inevitably dampen demand sentiment. This week, the dampening was reinforced by expectations of weakening oil demand in China as well.

A crude oil inventory build as reported by the U.S. Energy Information Administration failed to offset the bearish effects since it was accompanied by builds in fuel inventories, suggesting slower demand.

There is also OPEC+ and its upcoming virtual meeting on Sunday. “A significant driver for oil prices ahead will revolve around the upcoming OPEC+ meeting this weekend,” Yeap Jun Rong, market strategist at IG Asia, told Bloomberg. “Any further cuts may be unlikely and will be seen as a huge surprise.”

“The market expects OPEC+ to fully roll over its additional voluntary supply cuts into the second half of the year. Anything less will put further pressure on prices in the short term,” ING’s Warren Patterson and Ewa Manthey wrote earlier today.

“It would be more difficult for the group to surprise to the upside. Agreeing on deeper cuts would be challenging, particularly when a handful of producers are already producing above their target levels.”

By Irina Slav for Oilprice.com

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