- The Energy and Information Administration reported that crude stocks fell by 2.5 million barrels last week.
- US consumer prices increased by a smaller 0.3% in April.
- The monthly US retail sales report came in much lower than expected, at 0.0%.
Oil price rose nearly 1% on Wednesday, climbing from a two-month low in the previous session due to a big draw in crude inventories and softer inflation in the US. Consequently, there was optimism about demand and looming Fed rate cuts.
Data on Wednesday revealed a more significant decline in crude inventories than expected. The Energy and Information Administration reported that crude stocks fell by 2.5 million barrels last week when economists had forecast a 500,000-barrel drop. Experts attributed this decline to an increase in the refinery utilization rate. Moreover, it pointed to higher fuel demand, boosting oil prices.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
Another bullish catalyst came from the US consumer inflation report, which showed slower price pressures in April. This is a sign that inflation in the country has resumed the downtrend seen towards the end of last year. Consumer prices increased by a smaller 0.3% in April. Similarly, there was a drop in the annual figure to 3.4%. As a result, investors were confident that the Fed would cut rates this year.
At the same time, more data from the US revealed weaker consumer spending. The monthly retail sales report came in much lower than expected at 0.0%. This compares to the previous month, when sales jumped by 0.7%. High borrowing costs have weakened demand, meaning the Federal Reserve’s policy is restrictive enough to lower inflation to the 2% target. Therefore, there is no chance the central bank will hike rates again. Investors will now wait for the tone policymakers will assume after these reports.
Economists are optimistic that US inflation will decline this quarter. The labor market is also cooling, showing the Fed’s policy is having the intended effect. Before the inflation report, investors were pricing in a 69% chance of a Fed cut in September. However, this value increased to 73% after the report.
Notably, lower inflation in the US is bullish for oil because it means lower borrowing costs. When interest rates are low, businesses flourish, and demand for oil goes up. At the same time, lower inflation weakens the dollar, making oil cheaper for overseas buyers. This also boosts demand.
