Crude Oil News Today: Weak Short-Covering Rally Fueled by Fed Rate Cut Hopes

Oil Prices Climb on Fed Rate Cut Expectations

Oil prices extended gains on Thursday, buoyed by growing expectations of an interest rate cut from the U.S. Federal Reserve in September. However, gains were limited by OPEC+ plans to increase supply and higher U.S. inventories.

At 09:34 GMT, Light Crude Oil futures are trading $74.18, up $0.11 or +0.15%.

Fed Rate Cuts Anticipated

Nearly two-thirds of economists predict the Fed will cut interest rates in September, according to a Reuters poll conducted from May 31 to June 5. This expectation has offset bearish supply news. The Fed is expected to cut rates twice this year, starting in September, with a majority of forecasters seeing a reduction to a 5.00%-5.25% range. The likelihood of a July rate cut has decreased, with only five economists expecting a reduction then.

OPEC+ Supply Decisions and U.S. Inventories

OPEC+ agreed to extend most of their oil output cuts into 2025 but left room for voluntary cuts from eight members to be unwound gradually, beginning in October. This decision has weighed on prices, contributing to a weekly decline of about 3%. Additionally, U.S. crude stocks rose by 1.2 million barrels in the week ending May 31, contrary to analysts’ expectations of a drawdown. The unexpected increase in inventories has added to the bearish sentiment.

Market Reactions and Refinery Activity

Despite the inventory build, crude oil futures edged higher after the data release. By mid-afternoon, Brent crude was up 1.1% at $78.34 per barrel, while West Texas Intermediate (WTI) rose 1.2% to $74.09 per barrel. Refinery crude runs increased to 17.1 million barrels per day, the highest since December 2019, with utilization rates at 95.4% of total capacity, reflecting strong refinery activity.

Economic Indicators and Oil Demand

The U.S. economy expanded at a slower pace than previously estimated last quarter, contributing to the shift in fed funds futures bets towards two rate cuts. However, key inflation measures remain sticky, and the U.S. services sector returned to growth in May, potentially weakening the case for rate cuts. Inflation is not expected to reach the Fed’s 2% target until at least 2026.

Market Forecast

In the short term, oil prices are likely to experience volatility as traders balance the prospects of a Fed rate cut with increased OPEC+ supply and rising U.S. inventories. The anticipation of rate cuts could support prices, but the market remains cautious due to supply concerns. Therefore, the outlook remains bearish for the immediate future, with potential bullish shifts depending on the Fed’s actions and economic indicators.

Technical Analysis

Light crude oil futures are trying to claw back some of this week’s losses, but the early price action suggests it is still facing headwinds. Essentially we are witnessing a bear market rally.

Both the intermediate and long-term trends are down with the market trading well below their respective 50-day moving average at $80.34 and 200-day moving average at $78.13.

Given the the 2024 range of $66.19 to $86.64, its 50% level at $76.41 is also resistance.

A trade through $72.78 will signal a resumption of the downtrend with $69.64 the next potential target.