- The Fed slashed its forecast for rate cuts in 2025.
- Crude inventories fell by 934,000 million barrels last week.
- US crude exports jumped by 1.8 million barrels, supporting oil prices.
Oil prices remained fragile on Thursday after collapsing due to a less dovish outlook for Fed monetary policy in 2025. Meanwhile, a drop in crude inventories and a surge in crude exports helped support prices.
On Wednesday, the US Federal Reserve lowered borrowing costs by 25-bps. However, instead of signaling more rate cuts, the central bank slashed its forecast for 2025. When the Fed started its easing cycle in September, policymakers were confident that inflation would reach the 2% target. As a result, markets were betting on an aggressive cutting cycle. Meanwhile, policymakers projected about 100-bps of cuts in 2025.
However, that outlook slowly shifted as policymakers lost confidence in the progress to lower inflation. The last few US CPI reports have revealed accelerating price pressures. Although it was as expected, it highlighted a pause in the downtrend. Additionally, recent economic figures have shown a resilient economy. The labor market has remained strong, and consumer spending is high.
Notably, the US released its sales report on Tuesday, which revealed a bigger-than-expected jump in sales. Retail sales rose by 0.7% in November compared to estimates of 0.6%.
Meanwhile, Trump’s presidential win meant that the economy would likely reheat. His policy proposals on tax cuts and tariffs on imported goods might boost demand for local goods. Therefore, inflation would increase, putting a pause on rate hikes.
All these factors have contributed to a more cautious tone among policymakers. As a result, the Fed forecasted only 50-bps of rate cuts in 2025. Gradual easing will mean a longer period of restrictive borrowing costs that will curb growth and fuel demand.
US crude oil inventories (Source: EIA)
Elsewhere, crude inventories fell by 934,000 million barrels last week, showing steady demand. However, it was lower than the forecast of a 1.6 million barrel decline. Meanwhile, US crude exports jumped by 1.8 million barrels, supporting oil prices.
Meanwhile, the outlook for demand remains bleak with China’s fragile economy. In the coming year, economists will wait to see if stimulus efforts will support the weak economy. At the same time, markets will wait for signals from OPEC+ on supply. The group has been looking to increase supply but has postponed its plans due to poor demand. Increased supply amid poor demand might weaken oil in the coming year.
