Oil futures experienced a 1% drop after reaching 10-month highs, as traders cashed in on their profits and concerns about high interest rates potentially impacting oil demand emerged. The front-month futures for November delivery fell 1.2% to settle at $95.38 a barrel, while Brent November futures dropped approximately 1.3% to settle at $93.10 per barrel. The US West Texas Intermediate crude (WTI) also fell 2.1% to settle at $91.71 per barrel. Earlier, limited supply and reduced inventories pushed Brent front-month to $97.69, its highest level since November 2022, and WTI reached its highest level since August 2022 at $95.03. Oil traders quickly locked in profits after failing to breach the $100 level, prompting the pullback.
Some traders expressed concerns that elevated oil prices could contribute to inflation and lead the US Federal Reserve and other central banks to maintain high interest rates. Gelber & Associates analysts stated that high oil prices may persuade the Federal Reserve to prolong high interest rates as a means of controlling inflation. The US economy continued to exhibit steady growth with a 2.1% pace in the second quarter and appears to be gaining momentum in the current quarter. However, growth forecasts for the fourth quarter could be jeopardized if a US government shutdown occurs on October 1. With the benchmark overnight interest rate already increased by 525 basis points since March 2022, Fed officials are closely monitoring the super core price measure.
The narrowing gap between the WTI front-month and the second month maintained near a 14-month high, indicating a market structure known as backwardation. This occurs when spot prices surpass future prices, discouraging energy companies from storing fuel for future months. The Cushing, Oklahoma storage hub and delivery point for futures observed a drawdown, contributing to a historic low in storage levels. The shrinking Cushing storage raises concerns about the quality of the remaining oil. Additionally, falling US crude inventories, as well as production cuts by Saudi Arabia and Russia, have further tightened the prompt US supplies, narrowing the premium of Brent over WTI. Russia has confirmed that its fuel export ban will persist until the domestic market stabilizes, and there has been no discussion within OPEC+ about increasing supply to compensate for this ban.