Crude oil prices extended their recent recovery rally to rise more than one per cent shortly after the US Federal Reserve announced its first super-sized interest rate cut in four years, which boosted oil demand optimism. Low global crude stockpiles helped offset some of the concerns arising from weak consumption in China - the world's top oil importer, followed by India.

On Thursday, Brent futures settled at $74.88 a barrel, up by $1.23, or 1.7 per cent. US crude gained $1.04, or 1.5 per cent, to $71.95 a barrel. Crude oil prices have been recovering since the Brent benchmark fell below the $69 per barrel mark for the first time in nearly three years on Sept. 10, and both benchmarks have registered gains in five of the seven sessions since then.

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Crude oil recovers after US Fed rate cut

On Wednesday, the US central bank cut interest rates by half a percentage point. Interest rate cuts typically boost economic activity and energy demand, but some also saw the large cut as a sign of a weak US labor market. On Thursday, the Bank of England held interest rates at five per cent.

For the first time in four years, US Fed chair Jerome Powell-led rate-setting panel slashed its benchmark interest rate by (50 bps) half a percentage point to 4.75 per cent—5 per cent. The US central bank maintained the key borrowing rate at the 23-year high for 14 consecutive months since July 2023 to combat the worst inflation outbreak in almost 40 years. 

In its policy statement, the Fed policymakers said FOMC gained greater confidence that inflation is moving sustainably toward the two per cent target level. It added that “risks to achieving its employment and inflation goals are roughly balanced.”

UBS analysts said in a note to clients that declining global crude stockpiles should support oil prices going forward, pushing Brent back above $80 in the coming months. According to US government data, crude inventories in the US, the world's top producer, fell to a one-year low last week.

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Strategists at Macquarie said that the decline in inventories could accelerate next week as U.S. exports should rebound significantly from the disruptions caused by Hurricane Francine last week. Citi analysts said a counter-seasonal oil market deficit of around 400,000 barrels per day (bpd) will support Brent crude prices in the $70 to $75 a barrel range during the next quarter.

Rising tensions in the Middle East are also boosting crude prices. Walkie-talkies used by the Lebanese armed group Hezbollah exploded on Wednesday following similar explosions of pagers the previous day. Security sources said Israeli spy agency Mossad was responsible, but Israeli officials did not comment on the attacks.

Weak demand from China's slowing economy was limiting oil's gains. Statistics Bureau data showed that refinery output in China slowed for a fifth month in August. China's industrial output growth also slowed to a five-month low last month, and retail sales and new home prices weakened further.

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Impact of Fed rate cut on crude oil:

Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India: “We are neutral on oil. Oil demand is expected to stagnate in the Western world and China while production expands over profitable operations. The petro-nations will likely eventually phase out their curtailments as competition for market shares heats up. Geopolitics-driven price spikes are usually short-lived, and in the absence of an extreme flare-up in geopolitical conditions, the current downtrend in oil prices might extend a bit more.".

Rahul Kalantri, VP Commodities, Mehta Equities Ltd: "Rising tensions in the Middle East are also providing some support to crude oil prices. We anticipate continued volatility in crude oil prices. Crude oil is expected to find support at $68.80-68.10, with resistance at $69.90-70.50. In INR terms, support lies at ₹5,850-5,780, while resistance is at ₹5,985-6,065.

 

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