U.S. crude oil on Tuesday dropped 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 $2.92, or 4.09%, to trade at $68.40 a barrel. The Brent contract for February shed $2.97, or 3.91%, to trade at 73.06 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 Labor Department.
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 1 million bpd less than supply growth, according 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.