Oil snaps 5-day losing streak after ECB cuts interest rates, US Fed in focus; Brent rises over $1 to near $80/bbl
- Crude oil prices edged higher as lower interest rates decrease the cost of borrowing, which can speed economic growth and boost oil demand.
Crude oil prices snapped their five-day losing streak and edged higher on Thursday, June 6, after the European Central Bank (ECB) cut interest rates for the first time in five years. Denmark's central bank followed with its own interest rate cut. The US Federal Reserve is now in focus as investors keenly eye its upcoming policy decision and have priced in a rate cut in September.
Brent crude futures were up $1.07 or 1.36 per cent at $79.48 a barrel. US West Texas Intermediate crude futures were up $1.09 or 1.47 per cent at $75.16. On Wednesday, oil benchmarks rose more than one per cent, bouncing off a slide of nearly $8 a barrel over the previous five sessions that took prices to four-month lows. Coming to domestic prices, crude oil futures last traded 2.2 per cent higher at ₹6,326 per barrel, on the multi-commodity exchange (MCX).
Also Read: Built-in capacity to targets: Why OPEC+ members clash over oil production capacity—Explained
What's driving crude oil prices?
-On Thursday, the ECB went ahead with its first interest rate cut since 2019, citing progress in tackling inflation but cautioning the fight was far from over. Denmark's central bank has now lowered its benchmark interest rate by 25 basis points to 3.35 per cent.
-Lower fuel costs and an easing of post-pandemic supply snags have helped drive inflation down to 2.6 per cent in the 20 countries using the euro, from 10 per cent in late 2022. Investors are now less certain than they were a few weeks ago that inflation has retreated enough for the ECB to institute a major easing cycle.
-In the US, economists now predict the Federal Reserve will cut interest rates in September, according to a poll conducted by Reuters. Lower interest rates decrease the cost of borrowing, which can speed economic growth and boost oil demand.
-The number of Americans filing new claims for unemployment benefits rose last week, and first-quarter unit labor costs rose by less than previously expected, said the Labor Department. While this shows a cooling labour market, it is unlikely to push the US Fed to start rate cuts.
-The Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed on Sunday to extend most production cuts into 2025, however it left room for voluntary cuts from eight members to be unwound gradually. OPEC Secretary General Haitham Al Ghais and Russian Deputy Prime Minister Alexander Novak expressed optimism about continued strong demand for oil.
-Trading house Trafigura's chief economist Saad Rahim said that the OPEC decision to phase out some output cuts, combined with strong fuel supplies, has decreased oil prices. Barclays analyst Amarpreet Singh said that oil markets have over-reacted to the mildly negative OPEC meeting outcome.
-Analysts also added that demand indicators have somewhat softened but have not fallen off a cliff. US crude stocks jumped by 1.2 million barrels in the week to May 31, data from the US Energy Information Administration (EIA) showed.
"Summer inventory draws should be enough to get Brent oil back into the high $80s-$90 range by September," but prices could come under pressure in 2025 from slower demand and non-OPEC supply growth, JP Morgan analysts wrote in a note. The bank forecasts Brent to average $83 this year and $75 next year.
Where are prices headed?
Analysts said that WTI crude oil futures edged higher on Wednesday after continuously falling for five days despite an unexpected rise in crude stocks. Oil came under pressure at the start of the week as OPEC+ agreed to extend most of their supply cuts but allowed for voluntary cuts from eight members to be gradually unwound starting in October.
‘’However, the rising odds of a US Fed rate cut this year amid a softening jobs market coupled with rate cut expectations from other major central banks aid the sentiments,'' said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.
Analysts noted that crude oil prices exhibited significant volatility and recovered from their lows amid increasing Federal Reserve rate cuts expectations following disappointing US ADP non-farm employment data. The Bank of Canada reduced interest rates by 25 basis points.
These interest rate cuts by various global central banks have mitigated demand concerns and the impact of rising crude oil inventories in the US, according to experts. The US 10-year bond yields corrected due to the anticipated Fed rate cuts in the September policy meetings, further supporting crude oil prices.
‘’The easing of output cuts by OPEC+ nations starting in October could limit the gains in crude oil prices. Crude oil has support at $73.70–73.10 and resistance at $74.20-74.90. In INR terms, crude oil has support at ₹6,120-6,050 and resistance at ₹6,270-6,340,'' said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.
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