By Scott DiSavino
NEW YORK (Reuters) -Oil prices eased about 1% on Wednesday on worries over weak U.S. gasoline demand and economic data that could cause the U.S. Federal Reserve to keep interest rates higher for longer.
High interest rates used to tackle lingering inflation can weigh on economic growth and reduce demand for oil.
Brent futures fell 62 cents, or 0.7, to settle at $83.60 a barrel, while U.S. West Texas Intermediate (WIT) crude fell 60 cents, or 0.8%, to settle at $79.23.
The premium of the Brent front-month over the second month, known in the industry as backwardation, fell to its lowest since January.
When a market is in backwardation, energy firms are more likely to pull oil out of storage and use it now rather than wait for prices to decline in the future. If the market switches to contango, with future contracts worth more than the front-month, energy firms could start storing oil for the future, which could depress prices.
U.S. consumer confidence unexpectedly improved in May after deteriorating for three straight months amid optimism about the labor market, but worries about inflation persisted and many households expected higher interest rates over the next year.
"Hopes of (Fed) rate cuts ... continue to be pushed back further out into the year," analysts at energy consulting firm Gelber and Associates said in a note.
Worries about U.S. gasoline demand, meanwhile, have kept gasoline futures prices near a recent two-month low, cutting gasoline and 321- crack spreads, which measure refining profit margins, to their lowest levels since February.
"Gasoline demand (is) still surprisingly weak in keeping supplies near normal levels as bullish seasonals diminish," analysts at energy advisory firm Ritterbusch and Associates said.
Looking ahead, investors are waiting for the release on Friday of the U.S. personal consumption expenditures (PCE) price index report for April.
The PCE, which is the Fed's preferred inflation barometer, is expected to hold steady on a monthly basis. Expectations for the timing of rate cuts have see-sawed, with policymakers wary of sticky inflation.
BULLISH FACTORS
The market is also looking for U.S. oil storage data from the American Petroleum Institute (API) trade group later on Wednesday and the U.S. Energy Information Administration (EIA) on Thursday. That data will be released a day later than usual due to the U.S. Memorial Day holiday on Monday.
In a forecast that should support crude prices, analysts projected U.S. energy firms pulled 2.0 million barrels of crude out of storage during the week ended May 24.
That compares with a build of 4.5 million barrels in the same week last year and an average increase of 1.1 million barrels over the past five years (2019-2023).
Traders and analysts also said they expect OPEC+, which includes the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, to keep voluntary production cuts of about 2.2 million barrels per day (bpd) in place at its meeting on Sunday.
In China, the world's second biggest economy after the U.S., the economy is set to grow 5% this year after a "strong" first quarter, the International Monetary Fund said, upgrading its earlier forecast of a 4.6% expansion.
The IMF, however, said it expects slower growth in China in the years ahead.
Heightened tensions in the Middle East also held back the crude price decline.
Israel sent tanks on raids into Rafah and predicted its war on Iran-backed Hamas militants in Gaza would continue all year.
The Iran-aligned Houthis in Yemen, meanwhile, launched attacks on six ships in three different seas and Iran's semi-official Tasnim news agency said Tehran's sea-launched ballistic missile Ghadr was made available to the Houthis.