Oil drops 3% as high inflation risks stoke demand worries

PETROL prices fell by US$2 per barrel to their lowest in two weeks on Wednesday, as investors became more concerned that recent economic data will mean more aggressive interest rate increases by central banks, pressuring economic growth and fuel demand.

Brent crude futures settled US$2.45, or 3 per cent, lower at US$80.60 per barrel. The West Texas Intermediate crude futures (WTI) dropped US$2.41, or 3 per cent, to end at US$74.05 a barrel.

The settlement levels were the lowest for both benchmarks since Feb 3.

Minutes from the latest US Federal Reserve meeting showed a majority of Fed officials agreed that the risks of high inflation remained a “key factor” shaping monetary policy and warranted continued rate hikes until it was controlled.

“While better US economic data should mean better oil demand, the concern is that this forces the Fed to overtighten monetary policy to bring inflation under control,” said UBS analyst Giovanni Staunovo.

“This is also supporting the US dollar, which is not of help for oil.”

The US dollar Index gained for a second straight session, making greenback-denominated oil more expensive for holders of other currencies.

Other US economic reports, however, showed some troubling signs for the world’s biggest oil consumer. Sales of existing homes fell in January to their lowest since October 2010.

US crude stockpiles have grown weekly for about two months, and were forecast in a Reuters poll to have risen 2.1 million barrels last week.

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The American Petroleum Institute, an industry group, releases its inventory report at 4.30 pm ET (2130 GMT).

Demand for crude oil is also seasonally lower with major US refineries deep in maintenance season, said Price Group analyst Phil Flynn.

Some 1.44 million barrels per day of US refining capacity is expected to be offline in the week ending March 3, according to research company IIR energy.

A massive snowstorm in the US Northern Plains and Upper Midwest has also hit fuel demand, with 3,500 flights delayed or cancelled across the country so far, according to FlightAware.com.

US petrol futures slid almost 4 per cent to their lowest in two weeks. REUTERS