- The US CPI came in at 0.0% in May, below expectations for 0.1%.
- Fed policymakers forecasted only one rate cut in December.
- US crude inventories increased by 2.6 million barrels last week.
Oil prices rose on Wednesday amid ongoing tensions in the Middle East and softer-than-expected US inflation data. However, a slightly hawkish Fed policy meeting at the end of the day capped gains.
The ceasefire talks led by the US in the Middle East experienced challenges as Hamas made some unreasonable demands. As a result, this clouds the outlook for the war, which could impact oil supply. Any escalation would likely boost oil prices due to the prospects of tight supply.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
Meanwhile, the US Consumer Price Index report, which revealed that inflation was easing, provided more support for oil. The CPI came in at 0.0% in May, below expectations for 0.1%. This was a significant drop from the previous month when consumer prices increased by 0.3%. Consequently, oil traders were optimistic that the Fed would be ready to cut interest rates in September. After the report, the likelihood of a cut in September rose to 70%. At the same time, investors were pricing in two cuts in 2024.
High borrowing costs weaken the economy and lower fuel demand. Therefore, the prospect of early interest rate cuts is bullish for oil, as it would allow the economy and demand to grow.
However, this rate cut optimism was dampened when policymakers projected only one rate cut in December. The Fed remained cautious, noting that the economy has remained mostly robust despite the decline in inflation. Therefore, the central bank has room to hold high rates for longer.
According to the Energy Information Administration, US crude inventories increased by 2.6 million barrels last week. This indicated a decline in demand that weighed on prices. Economists had expected a smaller increase of 900,000 barrels. However, the outlook for demand remains optimistic after this week’s forecasts. The EIA and OPEC updated their estimates, pointing to a more positive outlook for demand growth in the long term. However, the outlook for supply could keep prices low.
Oil dropped 2% last week as investors worried about a looming surge in supply in the fourth quarter. At its policy meeting last week, OPEC+ announced plans to end its output cuts in October. This could significantly increase supply, which would loosen the market.
