Oil prices dropped on May 10, ending a three-day rally as an unexpected rise in US oil inventories sparked demand concerns and markets saw cautious trading as investors' anxiety as they await inflation data. Inflation data will help investors navigate Federal Reserve's next action on interest rates.

Brent crude last dropped $1.01, or 1.3 per cent, to $76.43 a barrel while US West Texas Intermediate (WTI) crude fell 99 cents, or 1.3 per cent, to $72.72. Both benchmarks had fallen about 2.5 per cent earlier in the session after two days of gains.

If inflation remains stubbornly high, it would mean more rate hikes and more hikes would mean pressure on global oil demand as they would push the US dollar higher making oil more expensive for other currency markets.

Surprise increase to US crude oil inventories

US crude inventories rose by about 3.6 million barrels in the week ended May 5 while petrol stockpiles rose by 399,000 barrels in a possible sign of weakening demand, according to the American Petroleum Institute. The data defied expectations from eight analysts polled by news agency Reuters for a drawdown of 900,000 barrels of crude and a 1.2 million barrel drop in petrol stocks. US government data on oil inventories is due on May 10.

The surprising US inventory build along with lower crude imports and April's softer export growth in China exacerbated worries about global oil demand.

In addition, the Biden administration plans to begin purchasing oil to replenish the Strategic Petroleum Reserve (SPR) helped cover speculative short positions, Robert Yawger, executive director of energy futures at Mizuho told Reuters.

Energy Secretary Jennifer Granholm said that the administration could start buying back crude oil for the SPR late this year after President Joe Biden last year directed the largest sale yet from the stockpile.

This was effectively a reiteration of previous statements that were not followed by actions of any kind but they also propped up prices for a while - however, leading to price decline in the latest case.

The Energy Information Administration (EIA) forecasts US crude production will rise 5.1 per cent to 12.53 million barrels per day this year, but lowered its output estimate for this year and next from previous forecasts.

"We expect the seasonal rise in oil consumption and a drop in OPEC crude oil production to put some upward pressure on crude oil prices in the coming months," the Energy Information Administration said in its Short-Term Energy Outlook. It cut its estimate for Brent and WTI prices by more than 7 per cent each to $78.65 and $73.62 a barrel, respectively.

Current major triggers for oil markets

The market is awaiting US consumer price index (CPI) figures for April on Wednesday. New York Fed President John Williams has said that if inflation remains too high, the central bank will raise rates again, even though the Federal Reserve dropped guidance about the need for future hikes.

The market is also awaiting the monthly oil report from the Organization of the Petroleum Exporting Countries (OPEC) on May 11 for clues on whether the group and its allies will need to cut output again to prop up prices.

OPEC and its allies, together known as OPEC+, agreed last month to cut production by 1.16 million barrels per day (bpd) from May through to the end of the year. OPEC+ have said that their meeting in early June will be in person in Vienna rather than a virtual one. Experts say that this indicates the cartel is looking to be more active in supporting oil prices and that further output cuts might be forthcoming.

Meanwhile, markets were also monitoring US President Biden and top Republican lawmakers' comments on raising the $31.4 trillion US debt ceiling, fearing an unprecedented default if Congress does not act in the next three weeks.