Oil reaches three week low on inflation concerns, Iran deal progress

(Bloomberg) --Oil plunged to the lowest in three weeks alongside a broader market decline with traders also concerned about growing supply from the U.S. and Iran.

Futures in New York tumbled 3.3% on Wednesday as increasing inflation fears rattled broader markets. Equities declined and the dollar strengthened, making raw materials priced in the currency less attractive.

Meanwhile, in the oil market, a U.S. government report showed domestic crude stockpiles surged by the most since mid-March last week. Traders are also following talks between world powers in Vienna around reviving an agreement that would remove U.S. sanctions on Iran’s crude exports. A top European Union official said the U.S. and Iran are close to a deal.

”There’s been building concern around inflation in the commodities sphere, as well as the economy more generally, and the possibility that the Fed will act,” said Michael Lynch, president of Strategic Energy & Economic Research. “We’ve had such a bull market based on monetary stimulus, so now if that’s pulled back,” prices could weaken.

Crude benchmarks have swung with those of wider risky assets in recent days with the Covid-19 crisis in India also pointing to weaker demand. The second wave of the pandemic has lowered Indian Oil Corp.’s sales of gasoline and diesel by 15%-20%. The nation’s biggest refiner also sliced operating rates at plants by more than 80%. However, consumption has shown marked improvement in the U.S. and Europe.

Meanwhile, Enrique Mora, the EU official in charge of coordinating diplomacy in Vienna, said he expects all parties to return to the 2015 agreement before Iran’s presidential elections on June 18. Iran has already been bringing back output, and said it will soon export oil from a new port, which would allow the country to bypass the Strait of Hormuz.

“Expectations of pending tightness may be dissipating,” Bart Melek, head of commodity strategy at TD Securities, said in a note. That comes amid demand concerns in the rest of the world, “growing risk that Iran may soon export more crude into the global marketplace and the possibility that OPEC+ may continue to increase production.”

Prices:

• West Texas Intermediate crude for June delivery lost $2.13 to settle at $63.36 a barrel
• Brent for July settlement fell $2.05 to end the session at $66.66 a barrel
• Both benchmarks fell the most in almost a week
• Brent stabilizes above 50-day moving average after retreat from $70

This week’s Energy Information Administration report provides the first look at the impact of Colonial Pipeline’s system outage, which had spurred panic-buying and supply disruptions across much of the U.S. Southeast and East Coast last week. Nationwide gasoline inventories fell nearly 2 million barrels last week, though fuel supplies in the U.S. Gulf Coast jumped by the most on record with the pipeline down.

Investors are also watching for signs of wavering in monetary support, which has underpinned a blistering rally across commodities so far this year. Minutes from the Federal Reserve’s meeting last month showed some officials signaling they’d be open to scaling back the central bank’s massive bond purchases program “at some point.” Commodities across the board were already lower much of the session.

Commodities declined with “signals from the broader markets about inflation and the impact that could have on slowing this pace of economic growth,” said Rob Thummel, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. For oil specifically, “the market is concerned about uncertainties around global supply and potentially lower global demand in the short-term.”

Other market news:

• A wave of strong oil buying by processors in China and Japan -- underpinned by one mega-refiner’s massive spree -- has lifted spot premiums in Asia’s physical market, adding to signs of rising global demand.
• Whether it’s more traffic on the roads, brighter economic readings, or persistently strong freight activity, Europe’s battered oil refineries are finally looking at some relief from Covid-19 and the devastation it wrought on fuel demand.
• Neste Oyj, the world’s biggest maker of renewable diesel, says it’s creating a new market for low-carbon jet fuel as passengers slowly return to the skies.