Oil falls on concerns over demand and rising US inflation

London — Oil prices fell for a second day on Wednesday on renewed demand concerns as coronavirus cases in Asia rise, and on fears that rising inflation might lead the US Federal Reserve to raise interest rates, which could limit economic growth.

Brent crude futures fell 85c, or 1.2%, to $67.86 a barrel at 10.05am GMT. It settled 1.1% lower on Tuesday after briefly climbing above $70 earlier in the session.

US West Texas Intermediate (WTI) crude futures dropped 90c, or 1.3%, to $64.59 a barrel, after a 1.2% fall on Tuesday.

Brent’s rise to $70 was driven by optimism over the reopening of the US and European economies, among the world’s biggest oil consumers. But it later retreated on fears of slowing fuel demand in Asia as Covid-19 cases surge in India, Taiwan, Vietnam and Thailand, prompting a new wave of movement restrictions.

“Yesterday’s trade proved again that $70 signals irrational exuberance,” said Vandana Hari, energy analyst at Vanda Insights. “Assessing the global demand picture remains challenging as reopenings and restrictions across the world are probably the most diverse since the start of the pandemic.” 

Uncertainties over inflation also prompted investors to reduce exposure to riskier assets such as oil.

“There is a wider risk-off play that’s going on,” said Westpac senior economist Justin Smirk.

Smirk said speculation that the US Fed might raise rates because of inflation fears weighed on the outlook for growth and thus on commodities demand.

“The Fed’s very serious [about holding rates low], but the market’s speculating about earlier movement,” he said.

The Fed has indicated that interest rates will stay at their current low levels to the end of 2023 though futures markets show investors believe rates may start to be raised by September 2022.

Investors will also be watching out for the latest US crude and products stocks data from the US Energy Information Administration due on Wednesday.

Reuters