- Oil prices ended down in July.
- Oil rallied after reports that a Hamas leader was killed in Iran.
- The Fed signaled the likelihood of a rate cut at the September meeting.
Oil prices rose by 3% on Wednesday and continued higher on Thursday as investors worried about a possible escalation in the Gaza war. At the same time, the Fed opened the door to a September rate cut, improving the outlook for oil demand.
Nevertheless, this sudden oil rally was insufficient to offset oil’s monthly losses. Oil prices ended July down, with Brent losing 7% of its value and WTI losing 4% of its value.
WTI (Source: Nymex, Bloomberg)
The tides shifted suddenly for oil prices after reports that a Hamas leader died in Iran. Initially, oil had fallen at the likelihood of a ceasefire in the Gaza war. However, all this changed when Hama’s Ismail Haniyeh was assassinated. This development could destroy the negotiations for a truce. Moreover, Hamas might retaliate, escalating the war. Such an outcome could put oil distribution at risk, tighten supply, and increase prices.
Elsewhere, oil got support as the dollar weakened after the Fed policy meeting. A weaker dollar makes commodities cheaper for foreign buyers, increasing demand. At the same time, oil traders were optimistic about rate cuts in the US. Notably, the Fed signaled the likelihood of a rate cut at the September meeting. However, Powell said they were not thinking of a bigger 50bps cut.
Nevertheless, markets pushed up expectations for rate cuts to 72bps in 2024. Lower borrowing costs are bullish for oil because they spur growth and increase fuel consumption. Investors are now waiting for the US nonfarm payrolls report for more clues on Fed rate cuts. Forecasts show that the US economy added fewer jobs in July, which could boost rate-cut bets.
Furthermore, oil benefitted from a bigger-than-expected drop in US crude oil inventories. Notably, stocks fell by 3.4 million barrels last week, beating forecasts for a 1.1 million barrel drop. It was the fifth week of declines, indicating solid oil demand. Moreover, analysts noted that the increased demand came from a surge in exports.
Meanwhile, lingering demand concerns kept gains in check as China’s economy remained fragile. Data revealed that manufacturing activity in the country fell in July. Since China is the largest consumer of oil, weak demand in the economy dims the outlook for oil demand.
