Oil prices edge up ahead of US Fed rate decision

China’s central bank cuts key short-term policy rate for first time in 10 months

An oil pump jack in Stoughton, Canada. Goldman Sachs has reduced its oil price forecasts, citing stronger-than-expected supply and weak demand. AFP

Oil prices rose on Tuesday after Brent crude fell by about 4 per cent the previous day, ahead of a US Federal Reserve policy meeting.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.97 per cent higher at $72.54 a barrel at 12.07pm UAE time while WTI, the gauge that tracks US crude, was up 0.72 per cent at $67.60 a barrel.

On Monday, Brent settled 3.94 per cent lower at $71.84 while WTI fell 4.35 per cent to $67.12.

“The oil market doesn't appear like it will get tight any time soon on fears that China’s weak post-Covid recovery won’t be improving anytime soon and as Russia continues to sell more oil to China and India,” said Edward Moya, a senior market analyst at Oanda.

On Tuesday, China’s central bank cut a key short-term policy rate for the first time since August 2022 after disappointing economic data.

The People’s Bank of China lowered its seven-day reverse repo rate by 10 basis points to 1.9 per cent, from 2 per cent.

“In addition to all the bearish drivers, some notable oil bulls are abandoning their aggressive bullish call,” Mr Moya said.

Goldman Sachs has reduced its oil price forecasts, citing stronger-than-expected supply and weak economic growth in China, the world’s second-largest economy and top crude importer.

The investment bank expects Brent crude to trade at an average of $86 a barrel in December, down from its previous estimate of $95. It also lowered the Brent forecast for May 2024 to $93, from $100.

Investors will be keeping an eye on US inflation data that comes out on Tuesday and the Fed's interest rate decision on Wednesday.

The recent debt ceiling deal in America and positive economic data have lifted hopes that the central bank will pause its rate increase programme as officials meet today and tomorrow.

Higher interest rates could slow the global economy and dampen crude demand. The Fed raised interest rates by a combined 500 basis points since it started increasing rates in March 2022.

Analysts expect the US central bank to pause its tightening cycle this week and then raise rates for the eleventh time when it meets in July.

The US headline inflation rate is expected to have slowed to 4.1 per cent in May, from 4.9 per cent, while core inflation, which excludes food and energy, is estimated to have softened to 5.3 per cent, from 5.5 per cent.

“With every energy trader buckling up for a massive week of central bank rate decisions and important economic data, volatile price action should be expected,” Mr Moya said.

“The global economic outlook should [lead to] more crude demand destruction to occur, which could support oil prices remaining under pressure unless Opec+ signals and delivers on more production cuts.”

On June 4, top crude exporter Saudi Arabia announced a unilateral production cut of a million barrels per day for July and said that an extension could be possible.

The Opec+ group of 23 oil-producing countries has extended its current production cuts until the end of 2024.

The group has total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand, in place, including a 2 million bpd reduction agreed on last year and voluntary cuts of 1.66 million bpd announced in April.

Oil prices initially gained on the announcements but pulled back on a build-up in US fuel stocks and weak economic data from China.

The global oil market is expected to go into a supply deficit in the second half of the year, driven by higher crude demand in Asia and Opec+ supply cuts.

“The last few days have shown how fragile sentiment is in the oil market, with market participants focusing primarily on negative news,” said Giovanni Staunovo, a UBS strategist.

“Although demand remains resilient, prices are being driven more by supply news and demand growth concerns.”

The Swiss lender still expects the market to tighten in the second half of 2023 amid larger crude inventory declines.

Tanker trackers show a “modest” drop in oil in transit as a result of production cuts, UBS said.

“We still expect those declines to translate into falling oil-on-land inventories over the coming weeks and lift prices,” Mr Staunovo said.

Opec will release its monthly oil market report later today.