US Fed stimulus boosts oil prices for second consecutive week

Business a.m.

The oil market saw a slight decline on Friday, however, prices were poised to close out a second consecutive week of gains, largely due to a reduction in U.S. interest rates and diminishing global oil inventories.

The Brent crude futures were down 35 cents, or 0.47 percent, at $74.53 a barrel, while U.S. WTI crude futures were down 25 cents, or 0.35 percent, at $71.70. Despite the slight retreat, both benchmarks were on track to record gains of more than four percent for the week.

After reaching a near three-year low of $69 per barrel on September 10, oil prices have been gradually recovering.

Giovanni Staunovo, an analyst at UBS, remarked on the cause of the recent rebound in oil prices, noting: “U.S. interest cuts have supported risk sentiment, weakened the dollar and supported crude this week.

“However, it takes time until rate cuts support economic activity and oil demand growth.”

Crude oil prices saw an increase of more than one percent on Thursday, following the decision by the U.S. Federal Reserve (Fed) to lower interest rates by half a percentage point the previous day (Wednesday).

While interest rate reductions generally stimulate economic activity and energy demand, some analysts view the Fed’s move as indicative of a struggling U.S. labour market.

The Fed also projected an additional half-point cut in interest rates by the end of the year, a full point in 2024, and a further half-point decrease in 2026.

ANZ Research analysts offered their interpretation of the Fed’s actions, stating that the recent easing of monetary policy helped to strengthen the belief that the U.S. economy will evade a recession.

Another factor buoying oil prices was a fall in U.S. crude oil stockpiles to a one-year low last week.

Citi analysts predicted that a counter-seasonal oil market deficit of approximately 400,000 barrels per day (bpd) would sustain Brent crude prices within the $70 to $75 per barrel range during the upcoming quarter. However, the analysts also forewarned that prices could potentially plummet in 2025.

Geopolitical tensions in the Middle East were also a factor driving up crude prices, as walkie-talkies used by the Lebanese armed group Hezbollah exploded on Wednesday, following the similar explosions of pagers the previous day.

Security sources have attributed these attacks to the Israeli spy agency Mossad, although Israeli officials have refrained from commenting on the incidents.

Adding to the cautious atmosphere in the oil markets was the slowdown in China’s economy, which has been evident in the country’s refinery output and industrial production.

According to data released recently, China’s refinery output declined for the fifth month in a row in August, while industrial output growth reached a five-month low.