Crude Oil Futures
Fundamental Analysis

Oil Prices Surge as Powell Clarifies Rate Cut Outlook

  • Powell confirmed that there will be rate cuts this year.
  • There was a smaller-than-expected increase in US crude inventories last week.
  • Houthi militants continued attacking vessels in the Red Sea, causing supply worries.

Oil prices rose on Wednesday after Powell confirmed expectations of rate cuts this year in the US. Additionally, support for oil came from supply and demand worries. While supply continues to tighten, there are demand worries as China’s economy struggles.

During his testimony to Congress, Fed Chair Powell confirmed that there will be rate cuts this year. Still, he said the central bank would wait for more conclusive evidence that inflation was on a downtrend. However, traders focused on the fact that borrowing costs will decrease, boosting oil demand. Since the year began, the US economy has shown resilience, especially in the labor market. As a result, rate-cut bets have fallen sharply. Moreover, the outlook for rate cuts became uncertain. Therefore, investors were relieved when Powell said interest rates would reduce in 2024.

Furthermore, the dollar fell after Powell’s speech, making oil cheaper for buyers with other currencies and increasing demand.

Elsewhere, there was a smaller-than-expected increase in US crude inventories last week, which was bullish for oil. Additionally, gasoline and distillate inventories fell more than expected, showing a tight market. 

Meanwhile, there was cause for supply concerns due to the recent OPEC+ supply cut extensions. The group agreed on Sunday that voluntary output cuts would extend into the second quarter. Russia pledged to increase its output cuts, surprising most market participants. This could further tighten supply in the long run, pushing oil prices higher.

Additionally, ongoing tensions in the Middle East have caused disruptions to the oil supply. The most recent talks for a ceasefire ended without an agreement, meaning the war could escalate. Meanwhile, in the Red Sea, Houthi militants continued attacking vessels, causing supply worries. 

US private payrolls (Source: ADP Research Institute)

US private payrolls (Source: ADP Research Institute)

Meanwhile, traders absorbed data from the US, where private payrolls increased but missed forecasts, showing weaker performance in the labor market. At the same time, job vacancies fell in January, suggesting an easing labor market. This was bullish for oil, as it could pave the way for Fed rate cuts.

Despite all the factors supporting prices, demand worries remain as China’s economy continues to struggle. On Tuesday, the country maintained its ambitious growth target of 5% without any additional stimulus. This announcement came as a disappointment, as investors had expected additional support for the weak economy.