- According to API figures, crude inventories rose by 2.264 million barrels last week.
- The oil demand outlook has brightened with the recent softer-than-expected US inflation data.
- The likelihood of a Fed rate cut in September rose to 67% after US retail sales figures.
Oil prices fell on Wednesday as a surge in inventories overshadowed demand optimism and supply concerns. However, there was little volatility as US markets were closed for a holiday.
According to American Petroleum Institute figures, crude inventories rose by 2.264 million barrels last week. Meanwhile, economists had expected stocks to fall by 2.2 million barrels. Such an increase is a sign that demand is still low. Investors will now await data from the Energy and Information Administration.
However, the market is optimistic that this will change with the US summer driving season. Many cars on the road mean fuel consumption will increase and oil prices will climb. Moreover, the outlook for demand has improved since the EIA slightly upgraded its forecasts.
The demand outlook has also brightened with the recent softer-than-expected US inflation data. Moreover, recent data, including retail sales, has shown weaker economic activity. In the short term, this might lower demand since high borrowing costs are hurting the business environment.
However, investors are more focused on the longer-term view. Weaker economic activity and inflation in the US will push the Fed to start cutting interest rates as soon as September. This, in turn, will benefit businesses that can borrow money at cheaper rates. As businesses do well, fuel consumption picks up.
Notably, the likelihood of a Fed rate cut in September rose to 67% after US retail sales figures revealed a smaller-than-expected increase in May. An increase in rate-cut bets is bullish for oil, and if this trend continues, traders might find more reasons to push prices higher. The US will release business activity data on Friday, further shaping the outlook for rate cuts.
On the supply side, there were concerns after a Ukrainian drone caused a fire at an oil terminal. As the wars in Ukraine and the Middle East continue, there is an ever-present risk of escalation. Moreover, there is a risk that the conflicts will impact oil distribution, denting supply and increasing prices.
Oil vs equities (Source: ICE, MSCI)
The outlook for oil is bright. Therefore, despite the pullbacks like that seen on Wednesday, the overall trend could remain up for some time. Moreover, oil prices rose with equities due to investor optimism.
