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HomeBusinessOil Prices Rise on Fed Rate Cut Hopes Amid OPEC+ Supply Decisions

Oil Prices Rise on Fed Rate Cut Hopes Amid OPEC+ Supply Decisions

Oil prices continued to rise on Thursday, buoyed by mounting expectations that the Federal Reserve will cut interest rates in September. However, gains were tempered by increased U.S. crude inventories and an OPEC+ decision to raise supply.

Market Dynamics: Fed Rate Cut Expectations

Brent crude futures edged up by 31 cents, or 0.40%, to reach $78.72 a barrel by 0330 GMT. Meanwhile, U.S. West Texas Intermediate (WTI) crude futures climbed 41 cents, or 0.55%, to $74.48 a barrel. This uptick follows a session of gains as the market anticipates a potential rate cut by the Federal Reserve.

A recent poll conducted by Reuters between May 31 and June 5 revealed that nearly two-thirds of economists now expect the Fed to reduce interest rates in September. Lower interest rates typically reduce borrowing costs, which can stimulate economic activity and increase oil demand, offsetting some bearish supply concerns.

However, the Federal Reserve’s interest rate strategy remains uncertain. The U.S. services sector, which constitutes a significant portion of the nation’s economic output, showed growth in May after a contraction in the previous month. This resurgence in service sector activity could weaken the argument for imminent rate cuts.

Supply-Side Constraints and Weekly Decline

Despite the bullish sentiment from potential rate cuts, oil benchmarks were on track for weekly declines of about 4% as of Thursday. This downturn was influenced by the recent decision from the Organization of the Petroleum Exporting Countries and allies (OPEC+).

Last Sunday, OPEC+ agreed to extend most of their existing oil output cuts into 2025. However, they also allowed for the gradual unwinding of voluntary cuts from eight member countries starting in October 2024. This planned increase in supply has added pressure on benchmark prices.

“We believe the OPEC+ move to unwind the 2.2 million barrels per day in the final quarter of 2024 will add further pressure to benchmark prices,” stated Emril Jamil, a senior analyst for crude at LSEG Oil Research. Jamil also highlighted that bearish sentiments are likely to persist due to expectations of weaker demand amidst rising inventory levels.

Additional Factors Influencing Prices

Adding to the downward pressure, Saudi Arabia recently reduced its official selling prices (OSP) for July crude, according to a document seen by Reuters on Wednesday. This price cut comes in response to declining Middle East crude benchmarks and shrinking profit margins for Asian refiners.

Moreover, U.S. crude inventories saw an unexpected increase. Data from the U.S. Energy Information Administration indicated that crude stocks rose by 1.2 million barrels in the week ending May 31, contrary to analysts’ predictions of a 2.3 million barrel draw.

Conclusion: A Complex Market Outlook

The oil market is navigating a complex landscape of potential rate cuts and shifting supply dynamics. While the anticipation of a Federal Reserve rate cut provides some support to oil prices, the impact of increased supply from OPEC+ and rising U.S. inventories continues to weigh heavily.

As the market looks forward, the interplay between these factors will be crucial in determining the future direction of oil prices. Stakeholders will need to closely monitor economic indicators and policy decisions to navigate the evolving landscape of the global oil market.

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