Oil rises 1% as optimism over Fed rate cuts offsets demand fears

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By Arathy Somasekhar

HOUSTON (Reuters) -Oil prices rose 1% on Wednesday, recovering from a four-month low, as hopes of a U.S. Federal Reserve rate cut in September outweighed concerns about demand after data showed stock prices had increased and oil supplies had increased.

futures closed 89 cents higher, or 1.2%, at $78.41 a barrel, while U.S. West Texas Intermediate crude futures rose 82 cents, or 1.1%, to $74.07.

US crude oil stock prices rose 1.2 million barrels in the week to May 31, compared with analysts’ estimates for a decline of 2.3 million barrels, data from the US Energy Information Administration showed. [EIA/S]

However, the increase was below the value that the American Petroleum Institute had set on Tuesday of an increase of more than 4 million barrels. [API/S]

Gasoline inventories rose 2.1 million barrels compared to expectations for a 2 million barrel increase, raising demand concerns as the week reflected fuel consumption around the Memorial Day holiday, which is traditionally seen as the start of the American summer season.

Distillate inventories rose by 3.2 million barrels, compared with estimates of a rise of 2.5 million, EIA data showed.

Meanwhile, the US Federal Reserve will cut its key interest rate again in September and again this year, according to a majority of forecasters in a Reuters poll.

Traders now see a nearly 69% chance of a rate cut in September, according to the CME’s FedWatch tool. Expectations hovered around 50% last week.

“The data outside the oil world was so weak that it would provide cover for the Fed to finally cut rates and stimulate some growth,” said John Kilduff, partner at Again Capital.

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Lower interest rates lower the cost of borrowing, which can stimulate economic activity and boost demand for oil.

U.S. stock indexes also rose on Wednesday as investors boosted expectations for an earlier-than-expected start to the Federal Reserve’s policy easing cycle.

Both contracts have fallen for five consecutive sessions, falling more than 1% on Tuesday to the lowest settlement level since early February.

The drop followed news from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, of plans to increase supply from the fourth quarter, despite recent signs of weakening demand growth.

“The comments from OPEC+ were ‘may or may not’, it’s not definitive and if prices are at the low $70 level, I don’t see OPEC increasing production,” said Dennis Kissler, senior vice president of the trade at BOK Financial.

Saudi Energy Minister Prince Abdulaziz bin Salman has said OPEC+ would pause or reverse cuts if demand was not strong enough to absorb the barrels.

The US could accelerate the pace at which it replenishes the country’s Strategic Petroleum Reserve, Energy Secretary Jennifer Granholm told Reuters on Tuesday, adding that she believes the global oil market is well supplied.

©Reuters.  FILE PHOTO: A general view of a French Esso oil refinery at night in Fos-sur-Mer, France, May 13, 2024. REUTERS/Manon Cruz/File Photo

However, prices were depressed by a cut, the first in five months, in Saudi Arabia’s official selling price of its flagship Arabian light crude to Asia.

The price cut for Asia underlines the pressure OPEC producers face as non-OPEC supply continues to grow and demand worries.

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