Oil futures experienced a slight dip in early trading on Thursday, taking a break from a recent rally that propelled the U.S. benchmark to its highest level since 2023. The West Texas Intermediate crude for September delivery fell by 0.2% to $84.22 per barrel on the New York Mercantile Exchange, after finishing Wednesday at its peak since November 16. Similarly, the global benchmark, October Brent crude, was down 0.1% at $87.43 a barrel on ICE Futures Europe, following its highest close since January 23.

Factors Driving the Market

Crude prices have been on an upward trajectory since late June, primarily due to concerns about supply. Saudi Arabia's voluntary production cut of 1 million barrels a day, which has now been extended through September, has contributed to the rise. Additionally, Russia has limited its crude exports and will continue with an additional reduction of 300,000 barrels a day until the end of September.

Previously, crude prices had suffered due to disappointment over China's economic performance after COVID restrictions were lifted. However, this week has seen crude shrug off signs of weakness in China's economy.

Stephen Innes, managing partner at SPI Asset Management, highlighted the changing dynamics between China and oil markets: "There was a time not long ago when if China sneezed, oil markets would tank. However, Saudi and Russian production cuts, providing the China offset, and resilient U.S. driving season demand round out the new bullish oil market thesis," he said. Innes further noted that the more OPEC+ cuts production during the peak U.S. summer driving season, the higher oil prices are likely to climb.

Despite the positive outlook for oil prices, rising fuel costs are causing concern in capital markets. This has raised questions about whether expectations for a smooth and continued decline in inflation pressures can be met.

Related: Why fuel inflation 'whack-a-mole' may complicate Fed's job in months ahead

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