Oil Prices on Track for Second Consecutive Weekly Gain Amid U.S. Rate Cuts and Falling Stockpiles
Oil prices are poised to finish the week higher despite a modest decline on Friday, following a combination of a significant U.S. interest rate cut and decreasing global crude stockpiles. Both Brent crude and U.S. West Texas Intermediate (WTI) saw strong weekly gains, continuing a recovery trend after a period of volatility in global oil markets.
As of Friday morning, Brent crude futures were trading at $74.53 a barrel, down 35 cents or 0.47%, while U.S. WTI crude futures fell by 25 cents or 0.35%, to $71.70 per barrel. Despite these small daily dips, both benchmarks recorded over 4% gains for the week, a notable rebound from earlier lows. Brent, in particular, has recovered significantly after dipping below $69 per barrel on September 10, marking its lowest price in nearly three years.
The resurgence in oil prices this week has been largely driven by the U.S. Federal Reserve’s decision to cut interest rates by half a percentage point. The rate cut has weakened the U.S. dollar and improved risk sentiment in financial markets, helping to boost oil prices. Analysts, however, caution that the full impact of the rate cuts on economic activity and oil demand may take time to materialize.
“U.S. interest rate cuts have supported risk sentiment, weakened the dollar, and provided support for crude prices this week,” said Giovanni Staunovo, an analyst at UBS. “However, it takes time for rate cuts to filter through and stimulate economic activity and oil demand growth,” he added, explaining why oil’s performance on Friday was somewhat muted compared to earlier in the week.
The Federal Reserve’s interest rate cut, announced on Wednesday, was part of an aggressive monetary policy aimed at stimulating economic growth amid concerns over a weakening U.S. labor market. In addition to this week’s rate cut, the Fed projected another half-point reduction before the end of the year, followed by a full percentage point cut in 2025, and a half-point trim in 2026. These moves are seen as efforts to ward off a potential economic downturn, which could have far-reaching effects on global energy demand.
“Easing monetary policy has reinforced market expectations that the U.S. economy will avoid a significant downturn,” analysts at ANZ Research said, underscoring the broader optimism surrounding the Fed’s actions.
Adding to the bullish sentiment, a significant drop in U.S. crude inventories last week has further supported prices. U.S. crude stockpiles hit a one-year low, a clear sign of tightening supply that has contributed to the rising prices. As demand picks up, the decrease in available crude has put upward pressure on both Brent and WTI prices, with analysts predicting a sustained price range of $70 to $75 per barrel in the near term.
According to Citi analysts, the global oil market is currently facing a counter-seasonal deficit of around 400,000 barrels per day (bpd), a supply shortfall that is likely to keep prices stable in the coming quarter. However, they cautioned that this trend may not last indefinitely, with a potential plunge in crude prices by 2025, when global supply may catch up with or exceed demand.
Geopolitical tensions in the Middle East have also contributed to the support for oil prices. This week, a series of explosions involving walkie-talkies and pagers, linked to the Lebanese militant group Hezbollah, has added to the region’s instability. While Israeli security sources have blamed the Mossad intelligence agency for the incidents, Israeli officials have remained tight-lipped, heightening concerns about escalating violence. Any further escalation in the Middle East could lead to disruptions in oil supply, further boosting prices.
Meanwhile, in Texas, a fire at a natural gas liquid pipeline in La Porte has raised concerns among locals about the risk of explosions. The fire, which has been burning for two days, has not only raised safety concerns but also added uncertainty to U.S. energy markets, potentially impacting oil and gas production in the region.
However, the oil market is not without its challenges. China, the world’s largest importer of crude oil, is grappling with a slowing economy, which is putting downward pressure on global demand. Refinery output in China has slowed for the fifth consecutive month, and industrial output growth has reached its lowest level in five months. As a major player in the global energy market, China’s economic performance will continue to weigh heavily on overall market sentiment.
Despite these headwinds, the combination of U.S. monetary easing, declining crude inventories, and geopolitical risks suggests that oil prices will remain supported in the near term. Analysts are closely watching market dynamics, including further developments in U.S. interest rate policy, supply trends, and the situation in the Middle East, as they seek to determine the future trajectory of crude prices.
As the week draws to a close, market participants are optimistic that the oil market will continue its recovery, albeit cautiously. With the U.S. Federal Reserve’s actions expected to stimulate demand and supply constraints persisting, the oil market appears set for continued volatility, but with an overall upward trend in the near term.
Source: Reuters
