Oil prices experienced a notable increase of 1% on Friday. Despite this uptick, they seemed poised for a weekly decline, driven by strong economic data from the United States. This data reinforced the expectation that interest rates might remain elevated for a longer duration. Elevated interest rates could potentially suppress fuel demand by increasing the cost of borrowing, thereby slowing economic activity.
The Brent crude oil contract for July delivery witnessed an increase of 87 cents, reaching $82.22 per barrel at 1:40 p.m. ET (1740 GMT). Additionally, the more actively traded August contract saw a rise of 84 cents, settling at $81.95 per barrel as we read in Reuters. This uptick indicates a short-term recovery in oil prices despite overall market apprehensions about future demand.
In the United States, West Texas Intermediate (WTI) crude futures saw a rise of 93 cents, reaching $77.80 per barrel. This increase was partly driven by the anticipation of high summer travel demand beginning over the upcoming weekend. The prospect of increased travel typically boosts fuel consumption, providing support to oil prices.
On Thursday, Brent crude had closed at its lowest level since February 7, while U.S. WTI futures ended at their lowest point since February 23. This decline reflected the market's response to various economic and geopolitical factors influencing supply and demand dynamics over recent months.
For the week, Brent crude was on track to close down by 2.1%, having declined for four consecutive sessions. This marked its longest losing streak since January 2. Similarly, WTI was set to close the week down by 2.8%. The persistent decline over the week highlighted the market's concerns about future oil demand amidst economic uncertainties.
Tim Evans, an independent energy analyst, provided insights into the market sentiment. He noted, "Petroleum prices remain soft in early Friday dealings, with worries over Federal Reserve interest rate policy and last week's bump in U.S. crude oil inventories still weighing on market sentiment." These factors have contributed to a cautious outlook among traders and investors regarding the oil market's future trajectory.
Minutes from the Federal Reserve's latest policy meeting, released on Wednesday, indicated that policymakers were questioning whether interest rates were sufficiently high to control persistent inflation. Some officials expressed a willingness to raise borrowing costs again if inflation rates surged. This uncertainty around future monetary policy has added to market volatility.
Since the release of the minutes, Federal Reserve Chair Jerome Powell and other policymakers have suggested that further interest rate hikes are unlikely. This reassurance has provided some relief to the markets, though concerns about the broader economic impact of current rate levels remain.
Higher interest rates increase borrowing costs, which can slow down economic activity and reduce oil demand. When borrowing becomes more expensive, businesses and consumers are less likely to take on new loans, leading to reduced spending and investment, which in turn can lower the demand for energy.
Consumer sentiment also dropped to a five-month low, driven by growing concerns about sustained high borrowing costs. Although pessimism among households would typically imply reduced consumer spending, the correlation between the two has been weak. This decline in consumer confidence reflects broader economic anxieties that could affect overall market conditions.
Tamas Varga, an analyst at PVM, stated, "Macroeconomic developments have been failing to provide meaningful support for oil. It is a fair bet that rate cuts are slipping away." His comments highlight the market's current struggle to find support from broader economic trends, particularly given the uncertainties surrounding future interest rate cuts.
The market is now looking forward to an meeting of the OPEC+ producer group, which includes the Organization of the Petroleum Exporting Countries and its allies, scheduled for June 2. The group is expected to discuss whether to extend voluntary oil output cuts of 2.2 million barrels per day. This meeting is crucial as it could influence future supply dynamics and, consequently, oil prices.
Most analysts anticipate that the current production cuts will be extended at least until the end of September. The extension of these cuts would aim to stabilize the market by balancing supply with the anticipated demand levels, thereby supporting prices.
In a rare admission of overproduction, Russia revealed this week that it had exceeded its OPEC+ production quota in April due to "technical reasons." This admission has surprised analysts and industry sources, highlighting Moscow's difficulties in curbing oil output. It underscores the challenges faced by major oil producers in adhering to agreed production limits.
Commerzbank analyst Barbara Lambrecht noted, "After the OPEC+ meeting, the market is likelyto increasingly focus on demand again. The upcoming Memorial Day weekend marks the start of the summer driving season in the U.S." Her comments point to the importance of seasonal demand patterns in shaping market expectations and pricing dynamics.
The U.S. Energy Information Administration (EIA) reported on Wednesday that the U.S. gasoline product supplied, a proxy for demand, reached its highest level since November in the week ending May 17. This increase in gasoline demand reflects rising consumer activity and could provide short-term support for oil prices.
Meanwhile, the U.S. dollar was on track for its largest weekly rise in a month-and-a-half on Friday, making dollar-denominated crude more expensive for foreign buyers. A stronger dollar typically exerts downward pressure on oil prices by reducing purchasing power in other currencies, thereby affecting global demand.
24.05.2024
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