Oil rises ahead of US Fed decision after IEA’s bullish demand forecast, rate-pause to support prices; check details
- Analysts and market participants expect the US central bank to pause interest rate hikes to observe the economic impact of 10 interest rate increases announced since March 2022.
Oil prices rose on June 14 as investors awaited the outcome of the US Federal Reserve's June meeting after bullish oil demand growth forecasts from the International Energy Agency (IEA) and oil producing cartel Organization of the Petroleum Exporting Countries (OPEC). Analysts and market participants expect the US central bank to pause interest rate hikes to observe the economic impact of 10 interest rate increases announced since March 2022.
Brent crude futures were up 76 cents, or 1 per cent, at $75.05 a barrel. US West Texas Intermediate (WTI) crude was up 63 cents, or 0.9 per cent, at $70.05. Both benchmarks climbed more than three per cent the previous day on hopes of rising fuel demand after China's central bank lowered a short-term lending rate.
Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a June 16 expiry, was last trading higher by 0.8 per cent at ₹5,775 per bbl, having swung between ₹5,710 and ₹5,789 per bbl during the session so far, compared to their previous close of ₹5,729 per bbl.
How will US Fed policy decision impact oil prices?
Federal Reserve Chairman Jerome Powell-led Federal Open Market Committee (FOMC) will announce the June policy decision later today. Investors taking positions in crude oil markets observe cautious trading ahead of the outcome.
Higher interest rates strengthen the US dollar, making commodities denominated in the US currency more expensive for the holders of other currencies. A pause in the US Fed's rate increases would spur economic growth and oil demand, supporting prices.
In May, the US Fed announced a hike of 25 basis points in interest rates, but signaled that it may pause further increases. The unanimous decision of the FOMC took the fed funds rate to a target range of 5 per cent to 5.25 per cent — the highest since August 2007.
"Rates will most likely remain unchanged today when the Fed contemplates its next move, but the more salient question is whether this pause also means that the peak rate of the current cycle has been reached or not," PVM Oil analyst Tamas Varga told news agency Reuters.
Global oil supply and demand forecasts
The International Energy Agency (IEA) has increased its oil demand growth forecast for this year by 200,000 barrels per day (bpd) to 2.4 million bpd, lifting the projected total to 102.3 million bpd.
According to IEA's oil 2023 medium-term market report, the annual demand growth would slow sharply over the next five years. The Paris-based agency, which advises developed nations, expects economic headwinds to reduce growth to 860,000 bpd next year and increasing use of electric vehicles to help to reduce that to 400,000 bpd in 2028 for overall demand of 105.7 million bpd.
"Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition," said IEA Executive Director Fatih Birol in a statement.
Energy prices soared last year after Russia, a major exporter of fossil fuels, invaded Ukraine and cut deliveries of natural gas to Europe. Global oil demand could peak before the end of this decade as the energy crisis has accelerated the transition to cleaner technologies, said the Paris-based agency gathering of the 31 mostly industrialised countries and much of the European Union (EU).
On the supply side, US crude oil stocks rose by about 1 million barrels in the week ended June 9, according to the American Petroleum Institute figures, contrary to an average estimate of a 500,000 barrel decline from analysts polled by news agency Reuters.
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