International crude oil prices settled lower in the previous session yet registered a second straight weekly gain, garnering support from the supersized 50 basis points (bps) interest rate cut by the US Federal Reserve and a dip in US supply. Signs of a slowing economy in top commodity consumer China gave prices a ceiling.

Brent futures settled down 39 cents, or 0.52 per cent, at $74.49 a barrel. US WTI crude futures settled down three cents, or 0.4 per cent, to $71.92. Prices have recovered after Brent fell below $69 for the first time in nearly three years on September 10. But for the week, both benchmarks settled up more than four per cent. Back home, crude oil futures settled 0.22 per cent higher at ₹5,976 per barrel on the multi-commodity exchange (MCX).

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What's driving crude oil prices?

-Analysts said the market concluded that a sub-$70 level combined with hedge funds' record-weak belief in higher prices of crude and fuel products would require a recession to be justified, a risk this week's bumper US rate cut helped reduce.

-Oil prices rose more than one per cent on Thursday, a day after the US central bank decided to cut interest rates by half a percentage point. Interest rate cuts typically boost economic activity and energy demand, but some analysts are worried about weakness in the U.S. labour market.

-US interest rate cuts have supported risk sentiment, weakened the dollar and supported crude this week. However, analysts said it takes time until rate cuts support economic activity and oil demand growth.

-The US Fed projected 50 basis points more of rate cuts by the end of this year, a full percentage point more cuts next year, and a further half-percentage-point reduction in 2026. The US Fed rate cut and Hurricane Francine's supple impact are the only two things currently propping up the market.

-Analysts said the thought of another 50 to 75 basis points has markets hopeful for some economic stability. About six per cent of crude production and 10 per cent of natural gas output in the US Gulf of Mexico were offline in the aftermath of Hurricane Francine.

-Additional support for oil prices came from declining US crude inventories to a one-year low last week. Low crude oil supply from US results in an uptick in prices over a deficit in near-term. Meanwhile, oil refiners in Asia, Europe and the US face a drop in profitability to multi-year lows.

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-Rising tensions in the Middle East, raising the risk of supply disruption, further boosted the oil market. Israel announced it killed a top Hezbollah commander and other senior figures in the Lebanese movement in an airstrike on Beirut as fears of a wider war rise. US President Joe Biden said reaching a Gaza ceasefire deal remains realistic, telling reporters: "We have to keep at it."

-In China, refinery output slowed for a fifth straight month in August, and industrial output growth hit a five-month low. China also issued its third and likely final batch of fuel export quotas for the year, keeping volume in line with 2023 levels. The move indicated that refinery margins are too weak to justify increased activity.

Where are prices headed?

Israel’s Defense Minister, Yoav Gallant, announced a “new phase” in the conflict with regional Islamist groups, raising concerns about a broader conflict that could involve Iran. According to the Energy Information Administration (EIA), US gasoline demand has dropped below nine million barrels, while jet fuel consumption has declined for a third consecutive week. 

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“Crude oil prices edged down to $71.80 per barrel. Still, the downside is likely to be limited as the Israeli military has reportedly advised residents in northern communities to stay close to shelters and limit outdoor activities due to the potential for retaliation from Hezbollah,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities. 

EIA data showed crude stockpiles at the key storage hub in Cushing, Oklahoma, are significantly below the five-year seasonal average.

According to analysts, crude oil prices have exhibited significant volatility, rebounding from their recent lows. Geopolitical tensions in the Middle East, following a series of explosions, have escalated concerns, with reports indicating the use of pagers and walkie-talkies by Hezbollah members. 

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"A potential retaliation against Israel could further influence oil prices. Crude oil gained support from expectations of increased global demand following substantial interest rate cuts by the Federal Reserve.  In the US, crude oil inventories have fallen to their lowest levels this year, and replenishing the SPR could bolster prices," said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.

Limiting factors include the Bank of England’s decision to maintain its policy rate at five per cent and concerns over weakening Chinese demand. We anticipate that crude oil prices will remain volatile. Key support levels for crude oil are $69.80 to $69.10, with resistance at $71.30 to $71.90. In INR terms, support stands at ₹5,910 to ₹5,840, while resistance is expected between ₹6,035 and ₹6,110," added Rahul Kalantri. 

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