Oil Steady, Set to Close Week Higher After Fed Rate Cuts and Reduced US Supply, According to Reuters

By Georgina McCartney

Oil prices remained stable on Friday, poised for a second consecutive week of gains, buoyed by significant reductions in U.S. interest rates and a decrease in domestic supply.

At 1:52 p.m. EDT, Brent crude futures were down 3 cents, or 0.04%, trading at $74.85 a barrel, while U.S. WTI crude futures rose by 39 cents, or 0.54%, to $72.34. Although concerns about a slowing economy in China, a major consumer of commodities, capped prices, both benchmarks experienced an approximate 5% increase over the week.

The recovery in prices comes after Brent fell below $69 for the first time in nearly three years on September 10. Ole Hansen, head of commodity strategy at Saxo Bank, noted that the market had concluded that sustained prices below $70, combined with hedge funds exhibiting a historically low confidence in rising crude prices, would necessitate a recession to be warranted. He added that the substantial U.S. interest rate cut this week diminished that recession risk.

On Thursday, prices increased by over 1% following the U.S. central bank’s announcement of a half-percentage-point interest rate cut. While interest rate reductions typically enhance economic activity and boost energy demand, some analysts have expressed concerns about the ongoing weakness in the U.S. labor market.

Giovanni Staunovo, an analyst at UBS, pointed out that U.S. interest rate cuts have improved risk sentiment, weakened the dollar, and provided a lift to crude prices this week. However, he emphasized that it may take time for these cuts to translate into improved economic activity and growth in oil demand.

The Federal Reserve projected an additional 50 basis points in rate cuts by the end of the year, a full percentage point in the following year, and another half-point reduction in 2026. Tim Snyder, chief economist at Matador Economics, remarked that the Fed’s decision to cut rates and the aftermath of Hurricane Francine are currently the primary factors supporting the market. He noted that the prospect of further rate cuts has instilled some hope for economic stability.

Approximately 6% of crude production and 10% of output in the Gulf of Mexico has been offline due to the impact of Hurricane Francine, according to the U.S. Bureau of Safety and Environmental Enforcement.

Oil prices also received a boost from inventory levels, which recently hit a one-year low. Analysts from Citi have indicated that a counter-seasonal oil market deficit of around 400,000 barrels per day is expected to maintain prices within the $70 to $75 per barrel range for the next quarter, although they cautioned that prices could decline in 2025.

Increased tensions in the Middle East, raising the risk of supply disruptions, further supported the oil market. Following the assassination of a senior Hezbollah commander, Israeli Prime Minister Benjamin Netanyahu reaffirmed Israel’s intentions, according to reports. Meanwhile, U.S. President Joe Biden suggested that achieving a ceasefire deal in Gaza remains a realistic prospect.

In China, refinery output has slowed for the fifth consecutive month in August, with industrial output growth reaching a five-month low. The Chinese government has also issued its third and likely final batch of fuel export quotas for the year, aligning volumes with 2023 levels. Analyst Alex Hodes from StoneX commented that this decision indicates refinery margins are too weak to warrant increased activity.

Additionally, oil refiners in Asia, Europe, and the United States are experiencing a decline in profitability, reaching multi-year lows. This weakness is further indicative of soft consumer and industrial demand, particularly in China, amid slowing economic growth and the rising adoption of electric vehicles.