Oil down on Middle East talks while investors await Fed meeting

Oil edged lower on Tuesday after U.S. data showed healthy crude output and exports, extending losses prompted on Monday by hopes of an Israel-Hamas ceasefire, while investors await signals on U.S. interest rates from the Federal Reserve meeting this week.

Brent crude futures for June, which expire on Tuesday, were down 35 cents, or 0.4%, at $88.05 a barrel by 1327 GMT. The more active July contract fell 49 cents, or 0.6%, to $86.71.

U.S. West Texas Intermediate crude futures were down 41 cents, or 0.5%, at $82.22.

The front-month contract for both benchmarks lost more than 1% on Monday.

The U.S. Energy Information Administration said production rose to 13.15 million barrels per day (bpd) in February from 12.58 million bpd in January while exports climbed to 4.66 million bpd from 4.05 million bpd in the same period. “New hopes of a ceasefire between Israel and Hamas caused oil prices to fall at the start of the week,” said Commerzbank analyst Carsten Fritsch, adding that prices were also pressured by lower crude demand from refineries. Israel is waiting for Hamas to respond to proposals for a halt to fighting in Gaza and a return of Israeli hostages before sending a team to Cairo to continue talks aimed at halting the seven-month conflict. Continued attacks by Yemen’s Houthis on maritime traffic south of the Suez Canal – an important trading route – have provided a floor for oil prices and could prompt higher risk premiums if the market expects crude supply disruptions.

“The upcoming Fed meeting also drives some near-term reservations,” said Yeap Jun Rong, market strategist at IG, adding that a longer period of elevated interest rates could trigger a further rise in the U.S. dollar while also threatening the oil demand outlook.

Some investors are cautiously pricing in a higher probability that the Fed could raise interest rates by a quarter of a percentage point this year and next as inflation and the labour market remain resilient.

Additionally, concerns over demand have weighed on sentiment, ANZ analysts said in a research note, as diesel and heating oil premieums against crude oil have fallen to their lowest in months.

Meanwhile, a Reuters poll found that oil prices could hold above $80 a barrel this year, with analysts revising forecasts higher on expectations that supply will lag demand in the face of Middle East conflict and output cuts by the OPEC+ producer group. [O/POLL]

(Additional reporting by Georgina McCartney and Emily ChowEditing by Jan Harvey and David Goodman)