Oil prices pare gains amid hopes US will cut interest rates

An oil pump jack in Stanton, Texas. US crude inventories increased unexpectedly last week, with commercial inventories rising by 3.6 million barrels, despite expectations of a 2.8 million barrel drop. AFP

Oil prices pulled back gains on Friday, amid hopes the US Federal Reserve will soon begin long-awaited interest rate cuts that will help to stimulate the world's biggest economy and boost demand for crude.

Brent, the benchmark for two thirds of the world’s oil, was virtually flat, settling 0.02 higher at $86.41 a barrel. West Texas Intermediate, the gauge that tracks US crude, shed 0.24 per cent to close at $81.54.

Both benchmarks are on track to post a monthly gain of more than 6 per cent to pull back from May's losses. In the year to date, Brent has jumped 12.8 per cent, while WTI has surged nearly 15 per cent.

From a technical perspective, the outlook for the oil market has improved, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

"US crude finally cleared the critical $82 [per barrel] resistance and returned to the positive trend that was building at the start of the year," she said in a note on Friday.

"The April-to-June sell off is fully behind us now, trend and momentum indicators remain positive while the market is not yet in the overbought territory meaning that there is room for further gains in the short run."

Oil's gains are also supported by the "growing concerns of US administration officials about the possibility of the conflict in the Middle East igniting and getting out of control on several fronts, in conjunction with the absence of encouraging data from the US economy or China this week", said Samer Hasn, a market analyst at XS.com.

Higher-for-longer interest rates have dented the prospects of a significant gain in oil prices. High interest rates weigh on economic growth, lowering crude demand.

The Federal Reserve on June 12 downgraded its rate-cut expectations for 2024, projecting it would lower US interest rates once this year in a clear sign that it plans to ease its restrictive monetary policy stance have been delayed.

Previous market expectations had called for three rate cuts in 2024.

The Fed left its target range unchanged at 5.25 per cent to 5.50 per cent. Updated projections from the Fed's June 11 to 12 meeting showed policymakers expect US rates will be lowered to 5.1 per cent this year.

Still, markets have rallied in the hopes that the US central bank will finally pull back from its historic streak of interest rate hikes.

Crude benchmarks traded in a narrow range this week ahead of the release of key US economic data. The US personal consumption expenditures price index, which the Fed considers a key measure for inflation, is due to be released later on Friday and might influence the Fed's decision on when to implement interest rate cuts.

Energy markets consultancy Vanda Insights said "sentiment in the broader financial markets is in a holding pattern ahead of a key US inflation report".

The overall US economy was in a better shape in the first quarter of this year with gross domestic product growth slightly revised upward to an annualised 1.4 per cent, the Commerce Department said on Thursday. But it is still markedly down from the 3.4 per cent posted in the same period in 2023.

Consumer spending was also weak, with US consumption growth revised downward to 1.5 per cent from a previous reading of 2 per cent, the department said.

Jobless claims, meanwhile, declined to 233,000 for the week ended June 22, the Labour Department said on Thursday.

"From a fundamental point of view, [economic] news are supportive," Ms Ozkardeskaya said.

Brent has gained nearly 11 per cent since the Opec+ meeting on June 3, at which the group decided to extend output cuts of 3.66 million barrels per day until the end of 2025.

They also announced a plan to gradually unwind voluntary output curbs of 2.2 million bpd from October 2024 to September 2025, initially leading to a fall in crude prices.

A few days after the announcement, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman criticised media speculation and market analyses surrounding Opec+ meetings, saying such conduct “fiddled with the market”.

US crude inventories, meanwhile, rose unexpectedly last week, the Energy Information Administration said on Wednesday.

Commercial inventories rose by 3.6 million barrels in the week ending on June 21, bucking expectations for a 2.8 million barrel drop.

By the end of the decade, the oil market's spare capacity is projected to reach levels previously recorded only during the peak of the Covid-19 lockdowns in 2020, the International Energy Agency said on June 12.

Total supply capacity is expected to increase to nearly 114 million barrels per day by 2030, passing the projected global demand by eight million barrels per day, the Paris-based agency said in a report.