U.S. crude oil falls nearly 4% as traders worry about inflation affecting demand

Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub in Cushing, Oklahoma, on April 21, 2020.

Dronebase | Reuters

U.S. crude oil on Tuesday dropped nearly 4% as inflation data stoked anxiety among traders that the Federal Reserve may not be ready to ease up on interest rates.

The West Texas Intermediate contract for January lost $2.71, or 3.80%, to settle at $68.61 a barrel. The Brent contract for February shed $2.79, or 3.67%, to settle at $73.24 a barrel.

While U.S. stocks shrugged off the latest inflation data, the oil markets saw cause for concern. The consumer price index edged up 0.1% in November after being unchanged in October, while prices increased 3.1% from a year ago, according to the U.S. Department of Labor.

Traders are worried that the Fed does not have inflation under control and will have to keep the foot on the accelerator when it comes to interest rates, said Phil Flynn, an analyst with the Price Futures Group.

Fed Chair Jerome Powell said earlier this month that it is “premature” to discuss slashing interest rates. Powell indicated that the central bank is prepared to raise rates if necessary.

Flynn said the confidence of the oil market has been shattered after a seven-week streak of losses.

Oil prices are falling as record production in the U.S., Canada and Brazil collide with a weakening economy in China, raising concerns among traders that the market is oversupplied.

Oil demand next year is expected to be about one million barrels per day less than supply growth, according to Daniel Yergin, vice chairman of S&P Global.

“As long as supply and demand dominate, you’re going to have that downward pressure on price,” Yergin told CNBC’s “Squawk Box” on Monday.

Several OPEC members and their allies such as Russia have promised to cut supply by 2.2 million barrels per day in the first quarter of 2024. Traders, however, are skeptical that the group will deliver on those cuts.

Yergin said OPEC+ faces a choice of whether they keep cutting supply or release oil to the market to let prices slide and undercut production in nations outside the group.

Don’t miss these stories from CNBC PRO:

Source: CNBC