On May 23rd, international crude oil futures continued to decline. The settlement price of the main WTI crude oil futures contract in the United States was $76.87 per barrel, a decrease of $0.70 or 0.9%. The settlement price of the Brent crude oil futures main contract was $81.36 per barrel, a decrease of $0.54 or 0.7%. As of now, crude oil has been declining for four consecutive trading days, WTI crude oil fell to a nearly three-month low. The main reason is that the high interest rate environment in the United States has brought pressure to demand, and in addition, US inventory data is bearish and geopolitical risk premiums are decreasing.

High inflation in the United States and cautious attitude of the Federal Reserve towards maintaining high interest rates for a longer period of time

A record of the last policy meeting of the Federal Reserve was released on Wednesday, and due to the stubbornness and persistence of inflation, decision-makers have doubts about the current inhibitory effect of interest rates on inflation. At the same time, it also limits the market's expectation of future interest rate cuts. A high interest rate environment may be maintained for a longer period of time in the future, and high interest rates will increase borrowing costs, thereby slowing economic activity and suppressing demand for oil.

Meanwhile, economic indicators indicate that interest rate cuts are currently not suitable. The US Composite Purchasing Managers Index (PMI), which tracks manufacturing and services globally by S&P, jumped from an initial value of 54.4 in May to a final value of 51.3 in April. Business activity in the United States reached its highest level in two years in May, with manufacturers reporting a series of input prices rising, and inflationary pressures may continue to increase in the future. In addition, Thursday's data also showed a decrease in the number of initial jobless claims in the United States last week, indicating an active labor market and an economy still in an overheated range.

Overall, the current market generally expects the US interest rate to be lowered by 25 basis points in 2024, possibly in September or November, which undoubtedly makes the market's performance more pessimistic. Because in the past few weeks, with inflation and other economic indicators gradually decreasing, the market has always believed that interest rates will be lowered about twice.

US oil inventories unexpectedly increased last week

Last week, the US crude oil inventory data showed mixed bullish and bearish performance, with unexpected increases in crude oil and distillate inventories, suppressing market confidence. However, the decline in gasoline inventories indicates that there is still support for future oil demand.

The report released by the US Energy Information Agency (EIA) on Wednesday showed an unexpected increase in US crude and distillate inventories last week. As of the week ending May 17th, US crude oil inventories increased by 1.8 million barrels to 458.8 million barrels, while analysts had previously expected a decrease of approximately 2.5 million barrels. Distillate oil inventories, including heating oil and diesel, increased by 379,000 barrels to 116.7 million barrels, while analysts had previously expected a decrease of approximately 400,000 barrels.

During the week, US gasoline inventories decreased by 945,000 barrels to 226.8 million barrels, with analysts expecting a decrease of approximately 700,000 barrels. The demand for gasoline in the United States has reached its highest level since November last year, and the start of the peak driving season in the United States may provide support for future demand.

Geophysical risk premium decreases

At present, there has been no ceasefire agreement reached in the negotiations between Israel and Kazakhstan, although Israel is still taking action in Rafah. But the United States and the G7 behind Israel may exert greater pressure on Israel in the future, and many parties do not want the conflict to escalate further. Currently, the geopolitical risks have eased. The risk premium of crude oil continues to decline.

SunSirs crude oil analysts believe that the future crude oil supply and demand game will continue. On the supply side, the OPEC ministerial meeting will be held on June 1st, at which time the organization will discuss production reduction policies. Currently, the policy tends to continue the previous production reduction scale. In addition, countries such as Iraq and Kazakhstan have submitted compensatory production reduction plans for exceeding quotas, and Russia's technical excess has also promised compensatory production reduction. There will not be too much change in the future supply side.

From the demand side, future demand may have two sides. On the one hand, gasoline demand in the United States is expected to increase as the summer driving season begins. At the same time, China is currently implementing intensive economic stimulus measures, and there is also some potential for future demand. On the other hand, in the medium to long term, oil demand is still constrained by the high interest rate environment in the United States, and there is a certain degree of uncertainty on the demand side.

Overall, the short-term decline in crude oil prices is a squeezing effect of amplified bearish sentiment on both supply and demand sides. However, the future supply and demand fundamentals do not support the maintenance of low oil prices. It is expected that there is still room for upward movement after the adjustment of oil prices.

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