Oil retreated from a nearly two-month high as traders weighed a weakening physical market against escalating Mideast tensions.
Brent and West Texas intermediate crudes both fell, trading near $86 and $81 a barrel, respectively. Oil remains locked in a narrow range as markets show rising US supplies and China’s economy appears sluggish.
Yet rising conflict in the Middle East is putting a floor under prices. Israel is lurching closer to a full-blown war with Hezbollah in Lebanon even as its fight against Hamas in Gaza continues. Meanwhile, Houthi rebels in Yemen have stepped up attacks on commercial shipping in the region.
China’s economic outlook is a major factor weighing on the market. A demand slowdown in the world’s biggest crude importer has forced refiners to cut operating rates and prolong maintenance.
The US outlook is more sanguine. The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year. Federal Reserve Bank of Atlanta President Raphael Bostic said he continues to expect one interest rate cut this year in the fourth quarter as inflation shows progress.
Pprompt spreads are signaling some strength, with the measure for Brent rallying above $1.50 a barrel in a bullish backwardation structure ahead of the contract expiry.
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