- US inventories dropped by 3.4 million barrels last week.
- US Consumer inflation came in lower than expected in June.
- The IEA forecasted global demand growth at 710,000 barrels per day in Q2.
Oil prices rose on Wednesday due to a larger-than-expected fall in US crude inventories last week. Meanwhile, investors were positioning themselves for the US inflation report after Powell’s cautious remarks.
Data from the Energy and Information Administration on Wednesday showed that US inventories dropped by 3.4 million barrels. Meanwhile, economists had expected a 1.3 million barrel drop. Similarly, gasoline inventories fell by 2 million barrels compared to estimates of a 600,000 barrel drop. The increase in demand came during the US Independence Day Holiday when most people travelled.
Investors were also cautious ahead of the US Consumer Price Index report which has a great impact on what the Fed does. In hist testimony, Powell noted that inflation was still above the 2% target. Therefore, policymakers will likely keep scrutinizing incoming data to see whether the recent decline will continue. His guarded speech led to a slight decline in Fed rate cut expectations.
Initially, markets had been confident that the Fed would be ready to cut rates in September. This confidence rose after last week’s jobs report which revealed slower job growth and increasing unemployment. Powell also noted that the risk of deterioration in the labor market had increased. However, it was not enough to push them to cut yet.
Notably, consumer inflation came in lower than expected in June, increasing the likelihood of a Fed rate cut in September. The monthly figure unexpectedly fell from 0.0% to -0.1%. Meanwhile, the annual figure dropped from 3.3% to 3.0%, below forecasts of 3.1%.
WTI futures (Source: Nymex, Bloomberg)
In previous sessions, investors had expected a disruption to oil supply due to hurricane Beryl. Therefore, when there was little impact, with operations in the Port of Houston returning to normal, prices fell. A disruption would have tightened supply, boosting oil.
The International Energy Agency forecasted global demand growth at 710,000 barrels per day in Q2 due to a decline in China’s demand. This would be the lowest in a year. Meanwhile, OPEC maintained its forecasts. If the outlook for oil demand worsens, at a time when OPEC+ is planning to start unwinding its supply cuts, oil will suffer. Furthermore, the impact of Middle East tensions has gone down. Therefore, there will be little to hold up prices.
