Oil prices fell on Wednesday, snapping a three-day rally as investors awaited developments from the fragile Middle East ceasefire and braced for a high-stakes summit in Beijing between U.S. President Donald Trump and his Chinese counterpart, Xi Jinping.
Brent crude futures dropped 86 cents, or 0.8 per cent, to US$106.91 a barrel at 4:09 a.m. ET. U.S. West Texas Intermediate futures fell US$1.04, or 1 per cent, to US$101.14.
Both benchmarks have largely hovered around or above the US$100 per barrel mark since the U.S.-Israeli war on Iran started at the end of February after which Tehran effectively shut the Strait of Hormuz.
“Concerns over supply disruptions and uncertainty surrounding the Middle East are keeping oil prices well supported, even as traders struggle to establish a clear direction,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.
“The market remains highly reactive to every update from the region, meaning sharp swings are likely to persist. Any further escalation or direct threat to supply flows could quickly revive strong upside momentum in both Brent and WTI.”
On Tuesday, oil prices rose more than 3 per cent, extending earlier gains as hopes for a lasting U.S.-Iran ceasefire faded. That dimmed the prospects of reopening the strait, through which about a fifth of global oil and liquefied natural gas normally flows.
Trump on Tuesday said he did not think he would need China’s help to end the war with Iran, even as hopes for a lasting peace deal dwindled and Tehran tightened its grip over the strait.
China is the biggest buyer of Iranian oil despite sanctions pressure from the Trump administration. Trump is scheduled to meet Xi on Thursday and Friday.
“The length of the disruption and the scale of the supply loss - already more than 1 billion barrels - means oil prices are likely to remain above US$80 per barrel for the rest of the year,” Eurasia Group said in a client note.
The war with Iran has started to take its toll on the U.S. economy, as higher oil prices lead to more expensive fuels, and economists expect to see second-round effects in the months ahead.
In April, U.S. consumer prices rose sharply for a second straight month, resulting in the largest annual increase in inflation in nearly three years, bolstering expectations that the Federal Reserve would keep interest rates steady for a while.
Elevated interest rates make borrowing more expensive, potentially hurting demand for oil.
As the Iran war continues, last week’s U.S. crude oil inventories fell for a fourth straight week and distillate inventories also declined, according to market sources citing American Petroleum Institute data. U.S. government data on stockpiles is due later on Wednesday.