Oil Jumps Amidst Rate Cut Pricing, Weak Data from China
The oil prices edged higher on Monday despite weak demand outlook from China following Beijing latest unimpressive economic data. The rally was supported by expectations of an interest rate cut in the US, the world’s largest oil consumer.
Brent climbed to $72.14 per barrel. US benchmark West Texas Intermediate (WTI) increased 0.93% to $68.38 per barrel after closing at $67.75 in the prior session.
Markets are positioned for an interest rate cut from the US Federal Reserve (Fed) following its meeting scheduled for Wednesday which would be the first rate cut since 2020.
The bank is likely to start an easing cycle however uncertainty remains in the market about how aggressive the rate cut will be. As investors increased their odds of an aggressive rate cut of 50 basis points, a reduction of 25 basis points remains on the table.
Lower interest rates generally reduce the cost of borrowing which stokes expectations of increased economic activity and oil demand. However, oil price gains were capped by increased demand concerns in the market following data from China.
Chinese data continues to point towards weaker domestic oil demand. Chinese refiners processed around 12.6 million barrels of crude oil per day in August, down almost 10% month on month and 17.5% lower year on year, according to ING commodities strategists.
Analysts said the numbers suggest that apparent oil demand fell below 12.5 million barrels per day, down more than 15% year on year and to its weakest level since August 2022.
The numbers also indicate that crude oil inventories in China built at a pace of around 3.2 million barrels per day in August, the largest monthly build in Chinese crude oil inventories going as far back as 2015, ING said.
Demand fears have left speculators increasingly bearish towards the oil market. The latest data from Baker Hughes shows that the US oil rig count increased by 5 over the last week to 588, the highest level since June.
However, it is unlikely that this momentum will be maintained given the recent weakness in the market. While spot WTI prices are trading just below $69/bbl, forward prices are even less attractive for US producers with calendar 2025 and 2026 prices trading at around $66 and sub-$65/bbl respectively.
There is little on the energy calendar for this week. Instead, broader markets, including commodity markets will be focused on the upcoming FOMC meeting on Wednesday.
While a cut is priced in, the uncertainty is whether the market would get a 25 or 50 basis points cut. A 50 basis points cut could be slightly bearish for oil as it may raise recession fears, ING said in a Monday note. #Oil Jumps Amidst Rate Cut Pricing, Weak Data from China
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