- Data on Wednesday revealed a smaller-than-expected drop in US crude stocks last week.
- Investors were concerned about China’s economy.
- Oil traders cheered Powell’s guidance on rate cuts.
Oil prices recovered slightly on Tuesday after falling 1% in the previous session due to a disappointing inventories report. However, the potential loss of Libyan oil output and Middle East tensions kept a floor on price declines.
Data on Wednesday revealed a smaller-than-expected drop in US crude stocks last week. Inventories fell by 846,000 barrels, missing forecasts of a 2.3 million barrel drop. Experts believe this drop came from a decline in exports since refinery runs were at a six-year high. It was also an indication of cooler demand, hurting oil prices.
At the same time, investors were concerned about China’s fragile economy. Most experts had expected a recovery in the second half. However, data has remained poor, and oil demand is slowing. Slower demand in a country that consumes so much global oil is bearish for prices.
Oil collapsed on Tuesday, falling 2% after rallying in the previous sessions. This decline continued on Wednesday but paused on Thursday. Although factors have weighed on prices, oil’s upside potential remains high.
Notably, the US central bank Chair Jerome Powell opened the door to a rate cut in September on Friday. This shift in tone came after a series of cooler-than-expected inflation figures and signs of economic slowdown. High interest rates have done the job of curbing demand in the US economy.
However, if the Fed holds these rates for longer, the economic impact will be terrible. This includes oil demand. Consequently, traders cheered the clear guidance on rate cuts. Lower borrowing costs will allow businesses to grow, boosting oil demand. Currently, markets are fully pricing in a rate cut in September. However, depending on incoming data, policymakers might decide on a 50 bps or 25 bps cut.
Libya’s oil output (Source: Bloomberg)
Elsewhere, rival government groups in Libya are fighting to control oil revenue and the central bank. Consequently, the country’s oil production has fluctuated. If this reflects in a drop in exports, oil will likely rally due to tighter market conditions.
Further support for oil came from the Middle East, where tensions between Israel, Gaza, and Iran remain high. The risk of escalation will keep investors on high alert, as any oil supply disruption can tighten the market.
