Oil prices rose nearly 2% on Wednesday due to a larger-than-expected drop in US crude inventories. At the same time, oil demand increased as Fed policymakers indicated that the recent decline in inflation would pave the way for rate cuts.
Brent futures (Source: ICE Futures Europe, Bloomberg)
The Energy Information Administration reported that inventories fell by 4.9 million barrels last week, indicating robust demand. This was much higher than estimates of a 30,000-barrel drop.
Fed comments showed more support for oil, showing growing confidence in the progress made on inflation. Top Fed policymakers said on Wednesday that inflation had eased, paving the way for rate cuts.
These sentiments come after last week’s consumer inflation report, which showed the first decline in four years. It was a significant achievement for the Fed, which has struggled to lower price pressures. At the same time, demand in the economy has decreased, reducing the chance that inflation will spike. Notably, unemployment has risen, and job growth has eased.
However, there is still no risk that the economy will tip into a recession. Retail sales data on Tuesday showed stronger-than-expected figures, indicating resilience. Economists had expected retail sales to fall by 0.3%. However, they were unchanged during the month, suggesting the US consumer is not as weak as expected.
All these factors have given investors the confidence to fully price a Fed rate cut in September. Lower borrowing costs benefit oil prices as fuel demand goes up. At the same time, rate cuts weaken the dollar, making oil cheaper for foreign buyers and increasing demand.
On Wednesday, the dollar fell to a 17-week low against other major currencies. It continued its decline despite the upbeat retail sales report because all focus was on the looming Fed rate cut.
Meanwhile, downward pressure on oil was felt as data from China revealed that the economy grew by 4.7% in Q2. This was the slowest growth since Q1 of 2023. China is the world’s leading consumer of oil. Therefore, the deterioration of China’s economy has a big negative impact on the outlook for oil demand.
