Why did Oil Prices Rise after Fed Rate Cut?

Oil prices rose sharply on Thursday after a good reading of US jobless claims followed the Federal Reserve’s excessive interest rate cut, easing concerns about a slowing US economy.

At 09:15 GMT (13:15 GMT), Brent crude futures were up 1.3% at $74.56 a barrel and West Texas Intermediate crude futures were down 1. 4% to $70.85 a barrel.

Jobless claims rise by less than expected
The number of Americans filing for unemployment benefits for the first time rose less than expected last week, with initial jobless claims coming in at 219,000 in the week ended Sept. 14, compared with an upwardly revised 231,000 the previous week .

Economists had forecast a consensus rate of 230,000.

The figure was better than expected and somewhat quelled concerns about the health of the US economy, especially after the Federal Reserve began its latest round of rate cuts on Wednesday, cutting interest rates for the first time since March 2020 by 50 basis points to a range of 4.75% to 5%.

While lower interest rates usually bode well for economic activity, the Fed’s aggressive tapering raised some concerns about a potential slowdown in economic growth.

While Fed Chairman Jerome Powell helped assuage some of those concerns, he also said the Fed had no intention of returning to an era of ultra-low interest rates and that the central bank’s neutral rate is likely to be much higher than what in the past.

His comments indicated that while interest rates would fall in the short term, the Fed was likely to keep rates higher over the medium to long term.

US inventories down, but product inventories up
Government data released on Wednesday showed a larger-than-expected decline in inventories of 1.63 million barrels.

While the decline was much larger than expectations for a 0.2 million barrel decline, it was also accompanied by a rise in distillate and gasoline inventories.

Increases in product inventories raised concerns that U.S. fuel demand is cooling as the summer travel season draws to a close.

Crude shortfall could boost Brent
Still, Brent crude prices could be boosted in the short term by demand possibly outstripping supply in the fourth quarter, Citi analysts said.

The reported decision by the Organization of the Petroleum Exporting Countries and its allies to delay the start of the reduction in voluntary production cuts, along with continued supply losses in Libya, is forecast to contribute to an oil market shortfall of 0.4 million barrels daily in the final three months of 2024, Citi analysts said.

They added that such a trend could provide some temporary support for Brent “in the region of $70 to $75 per barrel.”

Meanwhile, the benchmark could be further boosted by a possible recovery in recently tepid demand from top oil importer China, analysts said.

But they noted that they still foresee “new price weakness” in 2025, with Brent on course for $60 a barrel on a looming one-million-barrel-a-day surplus.

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Reference;

Reuters (2024) Oil prices rise after US interest rate cut By Reuters, Investing.com. Investing.com. Available at: https://www.investing.com/news/commodities-news/oil-prices-fall-as-us-rate-cut-fails-to-boost-market-sentiment-3622555 (Accessed: 19 September 2024).