Oil Prices Fall 2% as Inflation Worries Eclipse Middle East Supply Risks

Oil prices fell by approximately 2% on Thursday, reversing recent gains as investor focus shifted from geopolitical supply risks to broader economic concerns that could dampen global energy demand.

Market Weighs Demand Fears Over Supply Risks

Crude oil benchmarks retreated from multi-week highs reached a day earlier, with macroeconomic headwinds outweighing the immediate threat of supply disruptions in the Middle East.

• Brent crude futures for fell $1.72, or 2.2%, to settle at $76.30 a barrel.
• U.S. West Texas Intermediate (WTI) crude fell $1.44, or 2.0%, to settle at $72.08 a barrel.

Despite fresh hostilities between the U.S. and Iran, the market's attention turned to signs of slowing economic activity and persistent inflation in major economies, which could lead to reduced oil consumption.

Economic Headwinds Mount

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In the United States, minutes from the Federal Reserve's June meeting revealed policymakers' growing concerns about inflation. The prospect of higher interest rates to control inflation can slow economic growth and, consequently, curb oil demand. New York Federal Reserve President John Williams also stated Thursday he did not anticipate a sustained rise in energy prices for the rest of the year.

Meanwhile, in China, the world’s second-largest economy, producer price inflation surged in June to its highest level in four years. According to the source, this is putting pressure on manufacturers' profit margins and suggests weaker domestic demand could limit their ability to pass on costs.

Geopolitical Tensions Remain High

The price decline occurred despite significant supply-side risks. The U.S.-Iran conflict has delayed the full reopening of the Strait of Hormuz, a critical chokepoint for global oil transport. Analysts at Goldman Sachs noted in a report that oil flows from the Persian Gulf, after an initial recovery, had "retreated to the low-70s% of normal following recent attacks on tankers."

Adding to supply uncertainty, Ukraine's military said it struck more Russian tankers in the Sea of Azov overnight. This follows a Russian ban on diesel exports announced Wednesday, which had previously caused U.S. diesel futures to post their largest daily gain in four years.