- US crude inventories fell for the second week, showing a rise in demand.
- Powell was dovish despite the recent upbeat inflation readings.
- Supply concerns increased with Ukraine’s attacks on Russian refineries.
Oil prices fell on Wednesday despite a draw in crude inventories and the Fed maintaining its rate-cut outlook. Moreover, investors remained worried about supply disruptions in Russia as the war continued. Oil prices rallied in the previous two sessions due to these supply concerns. Therefore, the pause on Wednesday could have been due to profit-taking. At the same time, the outcome of the FOMC meeting was mostly in line with expectations.
US crude inventories (Source: EIA)
Notably, US crude inventories fell for the second week, showing a rise in demand. At the same time, gasoline inventories fell. This decline came as exports from the US increased and refining activity increased.
On Wednesday, the Fed concluded its policy meeting, maintaining interest rates. However, investors assessed the central bank’s economic projections and Powell’s press conference. According to the Fed’s projections, inflation in the US will continue falling in 2024, although at a slower pace. The bank expects the inflation rate to be 2.9% when the year ends. Meanwhile, growth is expected to remain steady in 2024. Continued resilience in the economy is good for oil, as it will likely keep demand high.
Meanwhile, the Fed expects the unemployment rate to only increase by 0.1% by the end of the year. At the same time, Powell was dovish at the press conference despite the recent upbeat inflation readings. According to him, the larger trend in price increases remains down. Therefore, markets should expect a total of three rate cuts in 2024.
Lower borrowing costs support oil prices as they spur economic growth, increasing oil demand. However, the timing for rate cuts remains uncertain, as Powell said it would depend on incoming data. Additionally, it will depend on how soon policymakers will be confident that inflation will reach the 2% target.
Despite the pullback on Wednesday, oil held near recent highs hit amid supply concerns. Prices rallied in the previous two sessions as supply concerns increased with Ukraine’s attacks on Russian refineries. Investors are worried that the attacks might lead to a substantial decline in oil exports. Producers would have to cut output, tightening the market.
With demand improving and supply getting tighter, it is clear that fundamentals support higher oil prices. Therefore, Wednesday’s decline might only be a short pause in the uptrend.
