Oil prices rise amid drop in US crude stocks and Fed rate increase

Inventories in the world's largest economy fell by 600,000 barrels in the week that ended on July 21, official data shows

Fed Chairman Jerome Powell said the process of getting inflation back down to 2 per cent has a long way to go. Reuters

Oil prices rose on Thursday amid a fall in US crude stocks and as the US Federal Reserve said that further interest rate increases would depend on economic data.

Brent, the benchmark for two thirds of the world’s oil, was trading 1.18 per cent higher at $83.90 a barrel at 11pm UAE time while West Texas Intermediate, the gauge that tracks US crude, was up 1.26 per cent at $79.77.

On Wednesday, Brent settled 0.86 per cent lower at $82.92 a barrel while WTI was down 1.07 per cent at $77.78.

The Fed raised US interest rates by 25 basis points, its 11th increase since March 2022, as part of its efforts to lower inflationary pressure on the nation's economy.

This has brought the Fed's benchmark rate to the target range of 5.25 per cent and 5.5 per cent, the highest in 22 years.

“Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2 per cent has a long way to go,” Fed Chairman Jerome Powell told reporters.

The central bank chief said it was “certainly possible” to raise the funds rate again at the September meeting, “if the data warranted” such a move.

Higher interest rates dampen economic growth, lowering crude demand.

“The Fed is keeping optionality for future rate increases but it probably won’t need them,” said Edward Moya, a senior market analyst at Oanda.

“The disinflation process will remain as the economy is weakening and the corporate world should start feeling the impact of tighter credit conditions.”

The International Monetary Fund marginally raised its forecast for the global economy for this year and the next on Tuesday but said it was “not out of the woods” due to headwinds that persist, despite the recovery being on track.

The fund revised its earlier forecast for this year upwards, raising it by 0.2 percentage points to 3 per cent, although lower than the 3.5 per cent expansion recorded in 2022. It is projecting a similar pace of growth in 2024.

Meanwhile, US crude stocks, an indicator of fuel demand, fell by 600,000 barrels to 456.8 million barrels in the week that ended on July 21, according to the US Energy Information Administration.

Analysts polled by Reuters were expecting a drop of 2.3 million barrels.

Petroleum stocks fell by 800,000 barrels last week, while distillate inventories decreased by 200,000 barrels, the EIA data showed.

US crude exports increased by 777,000 barrels per day to to 4.59 million bpd last week, indicating growing overseas demand as Opec+ tightens the oil market, Mr Moya said.

Oil prices have posted four straight weeks of gains amid signs of tightening crude supply and as cooling inflation in major economies has eased concerns about aggressive interest rate increases.

Swiss lender UBS said it expects Brent to rise to $85-$90 a barrel over the coming months as the market adjusts to Opec+ production cuts and higher crude demand in Asia.

Despite recession concerns, oil demand is projected to breach 103 million bpd in August for the first time, UBS strategists said in a research note on Thursday.

"Demand growth continues to be driven by emerging Asia, with China and India accounting for most of it, while demand from Brazil and the Middle East has been solid as well," the bank said.

Opec+ production, which hit a one-year low in June, is likely to be "considerably" lower this month due to Saudi Arabia's extra voluntary output cut and production interruptions in Mexico, Kazakhstan, Nigeria and Libya.

Earlier this month, the world’s largest crude exporter said it would extend its voluntary output cut of a million bpd until August.

Russia will also cut its oil supplies by 500,000 bpd in August, on top of the output reductions that have already been announced.

Last month, the Opec+ alliance of 23 oil-producing countries agreed to keep its current output policy in place until the end of 2024.

"We recommend buying commodities at this point in the cycle, which has proven to be a favourable strategy historically," MUFG said in a research note.

"Today’s set up bears striking resemblance to 2007’s late cycle wherein the global economy is below capacity and growing, yet inventories and spare capacity are depleted," Japan's largest bank said.

China, a key driver of the global oil demand growth, has led market concerns over its weaker-than-expected economic recovery, so any "countercyclical efforts" to boost domestic demand, improve expectations, and prevent risks will support the oil market, MUFG said.

"Going forward, the key lies in if we see a big shift in speculative sentiment," the bank said. "Indeed, in our view oil is poised to keep rising with rate hikes ending, the US dollar peaking, demand surging, all juxtaposed against the structural underinvestment thesis."