Oil prices dip after rallying on Red Sea woes, US SPR refill

Investing.com-- Oil prices fell slightly on Wednesday, retreating from strong gains in the prior session as supply disruptions in the Red Sea and the prospect of early U.S. interest rate cuts in 2024 lent some support to crude.

Prices were also encouraged by the U.S. government finalizing contracts to buy 3 million barrels of oil, aimed towards replenishing the Strategic Petroleum Reserve (SPR) after the reserve was drawn to nearly 40-year lows earlier this year. 

Shipping disruptions in the Red Sea- stemming from attacks on vessels by the Iran-aligned, Yemeni Houthi group, were a key point of support for crude prices in recent weeks, especially as the conflict heralded potential delays in deliveries through the Suez Canal.

The conflict showed little signs of deescalating, as the U.S. launched a naval task force to enforce peace in the region. The Israel-Hamas war- which is at the heart of the recent Houthi strikes- also raged on, with Israel flagging many more months of war. 

Beyond geopolitical disruptions, oil prices were also supported by the prospect of lower U.S. interest rates in 2024, as recent data pointed to sustained cooling in U.S. inflation. Lower rates are expected to foster economic growth and potentially drive up crude demand, although when the Federal Reserve plans to begin trimming rates remained uncertain. 

Brent oil futures expiring February fell 0.3% to $80.82 a barrel, while West Texas Intermediate crude futures fell 0.3% to $75.42 a barrel by 20:28 ET (01:28 GMT). Both contracts rallied over 2% each on Tuesday. 

US inventories awaited, data delayed 

Focus was now on U.S. inventory data, due on later on Wednesday and Thursday, for more cues on supply in the world’s largest fuel consumer. 

The release of this week’s inventory data was delayed by a day, due to the Christmas holiday on Monday.

A series of builds in U.S inventories over the past few weeks have rattled oil markets, especially as rising gasoline and distillate stockpiles pointed to cooling fuel demand in the country.

The builds also pointed to less tight markets in 2024 than initially expected- a trend that is expected to keep oil prices subdued. 

Oil set for 2023 losses

Despite recent gains, Brent and WTI futures were still set to lose around 7% each in 2023. 

Concerns over top importer China- as an economic rebound failed to materialize- were a major weight on prices, as were fears of a slowdown in global crude demand due to high interest rates and inflation.

Oil supplies are also expected to be less tight than initially expected in early-2024, following underwhelming production cuts from the Organization of Petroleum Exporting Countries (OPEC), while U.S. output remained at record highs.