Oil Prices Decline Amid Worsening Iran Ceasefire Tensions as Trump Prepares China Visit

Oil Prices Fall Amid Ongoing Iran War and US-China Summit

Oil prices declined on Wednesday, reversing a three-session rally, as investors waited for developments around the fragile ceasefire in the Iran war and US President Donald Trump's high-stakes summit with Chinese President Xi Jinping in Beijing.

Brent crude futures dropped by 82 cents, or 0.76%, to trade at $106.95 per barrel at 0051 GMT, while US West Texas Intermediate futures fell by 66 cents, or 0.65%, to $101.52 per barrel.

The recent price fluctuations have largely followed the US and Israel's attacks on Iran at the end of February, which led to Tehran effectively shutting the Strait of Hormuz. The strait, through which about a fifth of global oil and liquefied natural gas normally flows, has been a major point of contention.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Oil prices rose by over 3% on Tuesday, extending earlier gains, as hopes for a lasting US-Iran ceasefire faded, dimming prospects of re-opening the strait. However, Trump's comment on Tuesday that he does not think he will need China's help to end the war with Iran may have contributed to the decline in oil prices.

China, the biggest buyer of Iranian oil despite pressure from the Trump administration, is expected to feature prominently in Trump's discussions with Xi during their meeting on Thursday and Friday.

The ongoing conflict has already resulted in the loss of over 1 billion barrels of oil, and analysts predict that oil prices will remain above $80 per barrel for the rest of the year.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

The war with Iran has started to take its toll on the US economy, the world's largest, as higher oil prices lead to more expensive fuels. Economists expect to see second-round effects in the months ahead, including a decline in consumer sentiment and hiring intentions.

In April, US consumer prices rose sharply for a second straight month, resulting in the largest annual increase in inflation in nearly three years. This has bolstered expectations that the Federal Reserve will keep interest rates flat for a while.

Elevated interest rates make borrowings more expensive, potentially denting demand for oil. As the Iran war continues, US crude oil inventories fell for a fourth straight week last week, and distillate inventories also declined, according to market sources citing American Petroleum Institute data.

Official inventory data from the US Energy Information Administration, the statistical arm of the US Department of Energy, are due at 10:30 a.m. ET (1430 GMT) on Wednesday, with a Reuters poll predicting a decline in stockpiles.