The Week in Oil: U.S. Rate Cut, Mideast Tensions Drive Rebound But Demand Concerns Linger

By Giulia Petroni

Here is a look at what happened in oil markets in the week of Sept. 16-20 and what the focus will be in the days to come.

OVERVIEW: Oil prices are headed for weekly gains after rebounding from multiyear lows, supported by U.S. interest-rate cuts, escalating tensions in the Middle East and U.S. output concerns following Hurricane Francine. Brent crude, the international oil benchmark, currently trades at around $74.43 a barrel, while the U.S. oil gauge West Texas Intermediate is at around $70.94 a barrel. Still, further gains are capped by persistent fears of weakening demand in China and prospects of a global market surplus next year.

MACRO: The Federal Reserve's decision to cut interest rates by 50 basis points on Wednesday--as expected by most economists--provided some support to crude. The U.S. central bank signaled that focus has shifted to supporting the labor market, with new rate projections pointing to smaller 25 basis-point cuts through the end of the year.

"The softer monetary policy outlook has fostered expectations of stronger future demand, supporting a more likely bullish outlook for crude prices further out," said SEB commodities analyst Ole Hvalbye in a note to clients.

Meanwhile, the number of Americans who applied for unemployment benefits last week fell to the lowest level since mid-May--an indication that the job market remains healthy despite a slowdown in hiring.

GEOPOLITICAL RISKS: Fears of a broader war in the Middle East are providing underlying support to prices, but the overall market reaction to an escalation of tensions between Israel and Hezbollah appears to be limited. The Iran-backed group vowed to retaliate against Israel after accusing it of orchestrating a series of deadly explosions across Lebanon. On Friday, Israel launched what appeared to be another attack in Beirut, with what its military called a targeted strike in the Lebanese capital. In Libya, exports continued to slump as United Nations-led talks between rival political factions failed to break an impasse over control of the country's central bank.

SUPPLY AND DEMAND: Concerns over lackluster Chinese demand continue to dominate energy markets, with the latest Chinese data last weekend showing industrial output grew at its slowest pace since March, while retail sales also weakened further. The figures also indicated China boosted crude-oil stockpiles massively in August amid weak demand and softer refining, according to analysts.

Concerns over U.S. oil-and-gas output in the aftermath of Hurricane Francine instead provided some support to prices this week. As of Tuesday, estimates from the U.S. Bureau of Safety and Environmental Enforcement showed that 5.6% of current oil production and 9.7% of natural-gas production in the Gulf of Mexico was shut-in, signaling a gradual recovery. The Energy Information Administration reported Wednesday that U.S. oil production fell by 100,000 barrels a day to 13.2 million barrels a day and imports dropped by 545,000 barrels a day to 6.3 million barrels a day.

The latest EIA data also showed U.S. crude oil inventories fell last week amid lower production and imports, while gasoline and distillate fuel stocks edged higher. Crude stocks fell by 1.6 million barrels to 417.5 million barrels in the week ended Sept. 13, against expectations of a 1 million barrel fall. Gasoline and distillate stocks instead rose by 69,000 barrels to 221.6 million barrels and by 125,000 barrels to 125.1 million barrels, respectively.

WHAT'S AHEAD: At a macro level, investors will be focusing on U.S. Personal Consumption Expenditures price index data due next Friday, which will be followed by nonfarm payrolls figures on Oct. 4 and the Consumer Price Index on Oct. 10.

Following the Fed's jumbo rate cut, attention will likely turn back to demand worries, with China under the spotlight, market watchers say. According to MUFG analysts, "oil risks remain gravitationally to the downside. Beyond, Chinese malaise and an impending loosening in physical fundamentals, hedge funds' unprecedented net short positions on Brent crude and refined products reinforce the bearishness."

Traders are also expected to keep a close eye on developments in the Middle East and the state of production disruptions in Libya.

Write to Giulia Petroni at giulia.petroni@wsj.com

(END) Dow Jones Newswires

September 20, 2024 12:17 ET (16:17 GMT)

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