- The US Central Bank cut interest rates by 50-bps, catching some investors by surprise.
- US crude stocks fell by 1.6 million barrels while economists had expected a 500,000 barrel decline.
- Market participants kept a close eye on tensions in the Middle East, which kept escalating.
Oil prices recovered on Thursday after falling in the previous session due to a super-sized Fed rate cut. However, Middle East tensions kept a floor on price declines. At the same time, crude inventory data showed a bigger-than-expected decline.
WTI futures (Source: Bloomberg)
On Wednesday, the US central bank cut interest rates by 50-bps, catching some investors by surprise. The move raised fears about a weak labor market that could hurt oil demand. A high unemployment rate reduces consumer spending, leading to an economic slowdown. However, after the policy meeting, Powell noted that the central bank made a significant move to sustain low unemployment rates.
After months of waiting, the Fed finally implemented its first rate cut. Before the move, data had pointed to a resilient economy. At the same time, although inflation was cooling, there were spikes in August that increased the likelihood of a small Fed rate cut.
However, a last-minute shift in rate cut expectations came after news outlets published dovish reports supporting the case for a significant rate cut. Still, before the Fed meeting, markets had yet to fully price such a move. Therefore, it came as a surprise to some.
Nevertheless, by Thursday, oil prices rebounded after the initial shock. In the long run, lower borrowing costs spur economic growth, which increases oil consumption. Moreover, recent data has shown that the US economy is in a slow decline, easing fears of a recession. Therefore, there is still a high chance the Fed will achieve a soft landing with inflation easing and the economy remaining stable.
Elsewhere, market participants kept a close eye on tensions in the Middle East, which kept escalating. Before the Fed meeting, oil prices rose as conflict between Israel and Hezbollah escalated. Hezbollah accused Israel of using explosives in Lebanon and has threatened retaliation.
The unexpected rate cut on Wednesday overshadowed a report from the Energy Information Administration showing a big draw in crude inventories. Crude stocks fell by 1.6 million barrels, while economists had expected a 500,000 barrel decline. However, experts believe the decline came from Hurricane Francine rather than an increase in demand.
