Unexpected inventory build pressures oil prices as geopolitics fails to lift them.

In the early hours of May 22,Hong Kong's largest foreign exchange dealer international oil prices fell on Wednesday, despite news of potential escalation of tensions in the Middle East. This was due to a surprisingly large increase in US crude oil and fuel inventories, raising concerns about future demand outlook, thus suppressing the upward trend initially driven by supply risks.

WTI crude oil futures on the New York Mercantile Exchange fell 46 cents, or 0.74%, to settle at $61.57 per barrel; Brent crude futures on the London Intercontinental Exchange fell 47 cents, or 0.72%, to close at $64.91 per barrel.

Earlier in the trading day, reports emerged that Israel was planning a potential attack on Iranian nuclear facilities, which briefly pushed oil prices up by about 1%. The market was concerned that if the Middle Eastern situation escalates, it could lead to supply disruptions, particularly impacting Iran's oil exports directly.

Iran is the third-largest oil exporter in OPEC, with daily exports exceeding 1.5 million barrels. If Israel's actions materialize, it will likely disrupt Iran's export capability. UBS analyst Giovanni Staunovo pointed out that an Israeli attack would significantly increase the risk of supply disruptions, but ultimately, inventory data weighed on oil prices.

Data released by the US Energy Information Administration (EIA) on the same day showed that as of the week ending May 16, US crude oil inventories increased by 1.3 million barrels, gasoline inventories rose by 800,000 barrels, and distillate inventories grew by 600,000 barrels. The comprehensive increase in inventories was unexpected by the market, sparking concerns of weak demand.

Analysts believe that if Iran is attacked, it would not only affect the country's oil supply but could also impact the broader Middle East region, especially the Strait of Hormuz. This strait is one of the world's most critical oil transportation routes, with a major portion of oil from Saudi Arabia, Kuwait, Iraq, and the UAE exported through it.

Analysts stated: "If the Middle East situation escalates, it may lead to a daily supply shortage of up to 500,000 barrels, but OPEC+ should be able to quickly intervene to fill the gap."

Alongside geopolitical risks, production news also weighs on the market. It is understood that Kazakhstan's oil production unexpectedly increased by 2% in May, disregarding the previous OPEC+ production cut agreement.

Although the US and Iran are still negotiating a nuclear agreement, the Trump administration maintains a tough stance on sanctions against Iranian oil exports. Iranian Supreme Leader Khamenei emphasized in a public statement on Tuesday that Iran would not succumb to the political and economic pressure from the United States, further exacerbating regional tensions.

Overall, although geopolitical factors temporarily boosted oil prices, the signals of weak demand from the world's largest oil consumer, the United States, ultimately became the dominant market factor, causing oil prices to fall back during the session and close lower.

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