Oil prices rebounded after falling in Asian trading on Thursday, due to a mixed reading on US oil inventories. The Federal Reserve’s aggressive interest rate cut has raised some concerns about a slowing economy. Crude oil prices have rebounded sharply from their lowest levels in nearly three years last week. But that recovery now appears to be running out of steam, amid ongoing concerns about demand, especially in China, the largest oil importer.
A series of weak economic readings from China in August has dampened sentiment towards the Chinese economy. The Fed’s rate cut also showed the central bank’s concern about a slowing labor market, which could herald more economic headwinds in the coming months.
Brent oil prices rose 1.4% to $74.67 an ounce at 11:18 Riyadh time, while WTI crude prices rose 1.56% to $70.99. The US dollar index managed to hold above the important psychological resistance level of 100 against a basket of six currencies.
Mixed reactions to rate cut
The central bank announced a 50-basis point interest rate cut on Wednesday, the upper end of market expectations. It also announced the start of an easing cycle that will see additional rate cuts. Lower interest rates typically herald economic activity, but the Fed’s aggressive cut has raised concerns about a potential slowdown in growth. While Fed Chairman Jerome Powell helped to allay some of those concerns, he also reiterated that the Fed has no intention of returning to an era of ultra-low interest rates. The central bank’s neutral rate is likely to be much higher than in the past.
US Inventories Fall, Product Stocks Rise
His comments suggested that despite expectations of a near-term rate cut, the Fed is likely to keep rates high over the longer term. The dollar index rose after Powell’s comments, weighing on crude oil markets.
US Inventories Fall, Product Stocks Rise:
Government data released on Wednesday showed a larger-than-expected draw of 1.63 million barrels from inventories. Although the draw was much larger than the 0.2 million barrels expected, it was accompanied by an increase in distillate and gasoline stocks. The increase in product stocks has raised growing concerns about a decline in fuel demand in the United States, especially with the end of the summer travel season approaching.
Oil prices fell during trading yesterday, September 18, after rising in the previous two sessions, as investors awaited the expected decision of the US Federal Reserve to cut interest rates. In terms of trading, Brent crude futures fell by about 0.5% to $73.32 per barrel, while US crude futures fell by 0.6% to record $70.80 per barrel.
Brent crude was trading near $74 per barrel after rising by about 3% during the previous two days, with West Texas Intermediate crude exceeding $71. In a related context, the contracts for the two benchmark crudes rose by about a dollar per barrel on Tuesday, amid continued supply disruptions in the United States, the world’s largest oil producer, after Hurricane Francine. Traders also bet on increased demand after the Federal Reserve’s first rate cut in four years.
Oil prices fell yesterday after the American Petroleum Institute reported that U.S. crude inventories rose by 1.96 million barrels last week. Gasoline and distillate inventories also rose by 2.3 million barrels. These estimates raised investor concerns about weak U.S. demand. Actual inventory data from the Energy Information Administration is due later.
The size of the reduction in light of weak demand
The market also received support from expectations that the United States will buy oil to support the strategic reserve. Crude oil has been significantly lower since the beginning of the year, with negative expectations for demand in China and OPEC+ plans to re-inject supplies weighing on prices. These developments coincide with expectations about US monetary policy. Some refineries in Europe have cut processing rates due to lower profits from refining crude oil. In China, falling margins have led to some small companies going bankrupt.
Official data showed that about 42% of oil production in the Gulf of Mexico region was shut. This supply shock helped oil prices recover from the sharp sell-off earlier in the week, despite concerns about demand that pushed both crudes to multi-year lows. Both OPEC and the International Energy Agency this week cut their demand growth forecasts, citing economic difficulties in China, the world’s largest oil importer. Customs data showed that China’s crude oil imports fell by an average of 3.1% from January to August compared to the same period last year.
Concerns about demand in the United States have also increased. US gasoline and distillate futures hit multi-year lows this week, with analysts highlighting weaker-than-expected demand in the world’s biggest oil consumer.
The International Energy Agency reported that Chinese demand contracted for a fourth straight month in July, while fuel use was “tepid”. The outlook for next year is weaker, with a surplus expected in every quarter even if OPEC+ abandons plans to restore supplies, the report added.
Oil spreads show a mixed picture. While spot Brent spreads strengthened in line with futures during the week, they remain narrower than a month ago. The latest figure for spreads was 6 cents a barrel, compared with 76 cents a month ago.
