- After much speculation and anticipation, the Fed finally cut interest rates on Wednesday.
- Some experts believe the rate cut is a sign that the economy is slowing down.
- US crude inventories fell sharply by 9.3 million barrels.
Oil prices edged higher on Thursday, a day after the Fed lowered borrowing costs by 25 bps as expected, while markets were optimistic about a fall in crude inventories. However, downward pressure came from concerns about the state of the US economy.
After much speculation and anticipation, the Fed finally cut interest rates on Wednesday. The central bank has been under a lot of pressure in recent months to lower rates due to the sudden slowdown in the US labor market. Lower borrowing costs will support the economy by spurring growth. This, in turn, will boost oil demand.
Furthermore, Powell said the central bank would steadily lower rates over the rest of the year. It is clear that employment risks outweigh inflation risks. However, policymakers will keep assessing inflation. At the same time, some experts believe the rate cut is a sign that the economy is slowing down and will affect oil demand, at least in the short term.
“They did this now because clearly the economy is slowing down,” said Jorge Montepeque, managing director at Onyx Capital Group. “The Federal Reserve is trying to restore growth.”
The rate cut initially weighed on the US dollar. However, it recovered since traders had already priced in the move. The rally in the dollar on Wednesday made oil a bit more expensive for foreign buyers, leading to a bearish close.
Meanwhile, although Powell confirmed more cuts to come this year, the outlook for next year remains uncertain. Therefore, traders will keep watching incoming data for clues on future moves. Although recent data has shown weakness in the labor market, there have been pockets of strength.
Retail sales data earlier in the week revealed a 0.6% jump compared to the forecast of 0.2%. This pointed to robust consumer spending. If these pockets of strength also disappear, the Fed could be forced to maintain a dovish tone next year as well.
Crude oil inventories (Source: Econoday)
Elsewhere, data revealed that US crude inventories fell sharply by 9.3 million barrels. Meanwhile, economists had expected an 857,000-barrel decline. The drop came as oil exports rose while imports fell. It also highlighted solid demand in the previous week, boosting oil prices.
