Oil Prices Dip as Investors Worry About Demand Outlook

Crude oil prices declined by 1% on Tuesday, driven by weak U.S. consumer confidence data, which exacerbated concerns about economic outlook and demand, following a tepid start to the U.S. summer driving season.

Brent futures for August fell by $1, or 1.2%, settling at $85.01 a barrel. Meanwhile, U.S. crude futures dropped by 80 cents, or 1%, to trade at $80.83. This decline comes after both benchmarks experienced gains of approximately 3% last week, marking two consecutive weeks of increases and reaching their highest levels since April.

The drop in U.S. consumer confidence in June is a key factor, indicating potential economic weakening, which could translate into reduced gasoline demand. Despite households remaining positive about the labor market and anticipating moderated inflation over the next year, the overall economic concerns weigh heavily on demand forecasts.

Investor nervousness is also linked to high inventory levels, raising doubts about the strength of summer driving demand. Nonetheless, upcoming data is anticipated to show shrinking fuel stocks, which could provide some support to prices.

A preliminary Reuters poll on Monday suggested that U.S. crude oil and gasoline stockpiles likely fell last week, while distillate inventories might have risen. The American Petroleum Institute (API) is expected to release its inventory data later on Tuesday, with official government figures due on Wednesday.

Consumer spending power and oil demand are also tied to the Federal Reserve’s monetary policy. Fed Governor Lisa Cook indicated that the U.S. central bank might cut interest rates if economic performance aligns with expectations, though she did not specify a timeline. “The Federal Reserve’s decision on interest rates remains uncertain, but most of the crude market has factored in a quarter percent cut by September,” noted Dennis Kissler, senior vice president of trading at BOK Financial.

Additionally, oil prices continue to be influenced by supply disruptions due to Ukrainian attacks on Russian oil infrastructure. On June 21, Ukrainian drones targeted four refineries, including the Ilsky refinery, a major fuel producer in southern Russia.

Geopolitical tensions, particularly between Israel and the Iran-backed group Hezbollah, have also supported oil prices. Israeli forces conducted airstrikes on Gaza City, killing at least 24 Palestinians, according to Gaza health officials. Despite international mediation efforts, a ceasefire agreement has yet to be reached, suggesting that geopolitical pressures will continue to impact the oil market.

“Geopolitical tensions are contributing to ongoing volatility in the oil market. These tensions are likely to persist amid failed ceasefire efforts,” commented Claudio Galimberti, a director at consultancy Rystad Energy.