Oil prices dip as demand concerns outweigh Middle East supply fears

Tokyo: Oil prices eased in early trade on Wednesday as worries about global demand due to weak economic momentum in China and fading hopes for US interest rate cuts in the near term outweighed supply fears on heightened tensions in the Middle East.

Brent futures for June slipped 56 cents, or 0.62 per cent, to $89.46 a barrel by 0337 GMT, while US crude futures for May fell 63 cents, or 0.74 per cent, to $84.73 a barrel.

Oil prices have softened so far this week as economic headwinds pressured investor sentiment, curbing gains from geopolitical tensions, with eyes on how Israel might respond to Iran's attack on Israeli territory over the weekend.

"With oil prices highly sensitive to geopolitical risks, the past week has seen some wait-and-see consolidation in place as Israel's response will determine if there may be a wider regional conflict, which could significantly impact oil supplies," said IG market strategist Yeap Jun Rong.

"For now, the near-term weakness in oil prices may reflect some expectations that tensions may still be contained and that other key oil producer such as Saudi Arabia may jump in to mitigate any global supply shock," Yeap added.

"Demand concerns increased due to expectations that US interest rate cuts are likely to be delayed and weaker-than-expected economic data from China," said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

"Since the market had been rising until last week on supply worries amid escalating tensions in the Middle East, the relatively restrained Iranian aggression has not provided the ground for buying up," he said.

He predicted WTI would trade around $83-$88 without any new developments.

The run of disappointing data showing stronger-than-expected inflation means the Federal Reserve will likely need more time than previously thought to be confident that inflation is on the path to 2 per cent, Fed Chair Jerome Powell said.

In China, the world's biggest oil importer, the economy grew faster than expected in the first quarter, but several March indicators, including property investment, retail sales and industrial output, showed that demand at home remains frail, weighing on overall momentum.

In the Middle East, a third meeting of Israel's war cabinet set for Tuesday to decide on a response to Iran's first-ever direct attack was put off until Wednesday, as Western allies eyed swift new sanctions against Tehran to help dissuade Israel from a major escalation.

Analysts said, however, Iran's unprecedented missile and drone strike on Israel is unlikely to prompt dramatic sanctions action on Iran's oil exports from the Biden administration due to worries about boosting oil prices and angering top buyer China.

Meanwhile, US crude oil inventories rose last week more than expected by analysts polled by Reuters, however gasoline and distillates stockpiles fell, according to market sources citing American Petroleum Institute figures on Tuesday.

Official data from the Energy Information Administration, the statistical arm of the U.S. Department of Energy, is due on Wednesday at 10:30 am (1430 GMT).

"Sanctions are already in place, the issue is that they have not been strictly enforced for the last couple of years. And the big question is whether they will be enforced more rigorously now," said ING analysts in a client note.