- US crude inventories rose by 1.4 million barrels.
- The International Energy Agency downgraded its outlook for demand in 2025.
- US consumer inflation unexpectedly eased to below 3% in July.
Oil prices fell nearly 1% on Wednesday due to increased demand worries after a bigger-than-expected increase in US crude inventories. However, the move reversed on Thursday as oil traders cheered a rise in Fed rate cut expectations.
Data on Wednesday revealed that US crude inventories rose by 1.4 million barrels. It was the first increase in six weeks and was well above estimates for a drop of 2.2 million barrels. Consequently, investors worried about a sudden drop in demand.
Additionally, prices fell after another downgrade to the oil demand forecast. The International Energy Agency downgraded its outlook for demand in 2025, noting that China’s weak economy would significantly impact consumption. Initially, OPEC had revised its forecast for the same reasons. China is the largest consumer of oil. Therefore, a frail economy leads to a significant drop in global demand.
Another reason for the drop in oil prices was the easing Middle East tensions. Tensions initially peaked when a senior Hamas leader was killed. Since then, there have been fears that Iran will retaliate with a strike on Israel. However, the US sent warships to try to calm the situation. Moreover, experts believe an agreement in the ceasefire talks between Israel and Gaza will further ease tensions.
US CPI (Source: Bureau of Labor Statistics)
Meanwhile, US data revealed that the annual consumer inflation figure unexpectedly eased below 3% in July. On the other hand, the monthly figure increased by 0.2%, meeting expectations. So far, everything is lining up for the US Federal Reserve to start lowering borrowing costs in September.
The past few months have shown that inflation is on a consistent downtrend. At the same time, the economy is slowing down. Therefore, policymakers are gaining confidence in the progress and could soon start supporting a 25-bps rate cut in September.
On Tuesday, US wholesale inflation came in softer than expected, supporting the likelihood of a rate cut. The increased chance of rate cuts in the US is bullish for oil. Lower borrowing costs spur economic growth, increasing demand for fuel.
Markets are now awaiting the US retail sales report to gain more clues about the economy. A decline would further increase rate cut bets, boosting oil prices. On the other hand, an unexpected increase would lower rate cut expectations.
