Oil settles lower as inflation data gives way to market jitters

By Georgina McCartney

HOUSTON (Reuters) - Oil prices settled lower on Tuesday, after U.S. data stoked concerns that interest rates may stay high, but potential risks to supply from Mideast tensions and wildfires in Canada put a floor under prices.

Brent crude futures settled down 98 cents, or 1.18% at $82.38 a barrel. U.S. West Texas Intermediate crude futures (WTI) settled down $1.10, or 1.39% at $78.02 a barrel.

U.S. producer prices increased more than expected in April, feeding fears the Federal Reserve may keep borrowing costs elevated to fight inflation.

Fed Chair Jerome Powell said he expects U.S. inflation to keep declining through 2024 but warned he is less confident now, since prices rose more quickly than expected through the first quarter.

"The inflation story is not under control that is pulling demand back a bit and the thing that rubbed a little salt in the wound was Powell's comments", said Tim Snyder, economist at Matador Economics.

U.S. consumer price data is expected on Wednesday and will affect timing of rate cuts that could spur economic growth and oil demand.

Another stronger-than-expected inflation reading could feed worries that a too-hot economy will force the Fed to raise rates again, which could hinder growth.

Meanwhile on Tuesday, the Organization of the Petroleum Exporting Countries stuck to its forecast for relatively strong growth in global oil demand in 2024 and said there was a chance the world economy could do better than expected this year.

OPEC's monthly report said world oil demand will rise by 2.25 million barrels per day (bpd) in 2024 and by 1.85 million bpd in 2025.

Energy markets were also watching wildfires in remote western Canada that could buoy prices by disrupting oil supplies.

Firefighters on Monday were racing to contain one blaze in British Columbia and two in Alberta near the heart of the country's oil sands industry.

Canada has a 3.3 million barrel per day (bpd) production capacity, and is a key supplier of heavier crude.

"Spreading wildfires in Alberta oil sands impose downside risks to our constructive Canada production outlook as massive fires in the same region eight years ago triggered a temporary shutdown of over 1 million bpd oil production," said Goldman Sachs analysts in a note.

Meanwhile, conflict in the Middle East could be lending a floor to prices. Israeli tanks pushed deeper into eastern Rafah, reaching some residential districts of the southern border city where more than a million people had been sheltering.

"Uncertainty over Rafah and the blowback from that is keeping the market on edge as well," said Phil Flynn, an analyst at Price Futures Group.

U.S. crude oil and gasoline inventories fell last week while distillate stocks rose, according to market sources citing American Petroleum Institute figures on Tuesday. Official inventory data from the U.S. government is due on Wednesday.

The API figures showed crude stocks were down by 3.104 million barrels in the week ended May 10, the sources said on condition of anonymity. Gasoline inventories fell by 1.269 million barrels, and distillates rose by 673,000 barrels.

Brent crude futures edged down 62 cents, or 0.74% to$82.74 a barrel by 1640 ET shortly after API data was published, and U.S. West Texas Intermediate crude futures (WTI) fell by 68 cents, or 0.86% to $78.44 a barrel.

(Reporting by Georgina McCartney in Houston; Paul Carsten and Natalie Grover in London and Jeslyn Lerh in Singapore; Additional reporting by Colleen Howe in Beijing; Editing by Marguerita Choy, Alexandra Hudson, Ros Russell and David Gregorio)