Oil rises 6% in June on Middle East risk premium, US interest rate cut hopes; Brent rose 1% to $86/bbl

Crude oil prices pared some gains on Friday, June 28, but were on course for a weekly gain as investors weighed weak US demand for the fuel, but US inflation data for May boosted hopes for faster rate cuts by the US Federal Reserve. Crude oil benchmarks gained nearly six percent in June on geopolitical risk premium from the Middle East and economic data and U.S. crude stockpiles.

Brent crude futures for August settlement, which expire on Friday, rose eight cents to $86.47 a barrel. The more liquid September contract was down 0.14% at $85.14. U.S. West Texas Intermediate (WTI) crude futures were down 11 cents, or 0.13 percent, at $81.63. Brent was on track to gain about one for the week, while WTI futures were headed for a 0.1 percent loss.

Read also: Oil Rises After Middle East Tension, US Stocks Limit Fueling Supply Concerns; Brent rose 2% to $86/bbl

What determines the price of crude oil?

-While U.S. oil production and demand rose to a four-month high in April, demand for gasoline fell to 8.83 million barrels per day, the lowest level since February, according to the monthly U.S. Energy Supply report Oil of the EIA, published on Friday.

-However, the US Personal Consumer Expenditure (PCE) price index – the Fed’s preferred gauge of inflation – was unchanged in May, raising hopes for rate cuts in September. However, the reaction in the financial markets was minimal. For oil traders, the release went unnoticed, according to analysts.

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-Rising expectations of an imminent Fed easing cycle have triggered an increase in risks in stock markets. Traders now peg a 64% chance of a rate cut in September, up from 50% a month ago, according to CME’s FedWatch tool. Lower interest rates are a boon for oil as it boosts consumer demand.

-Oil prices may not change much in the second half of 2024, given concerns about Chinese demand and the prospect of higher supply from key producers to counter geopolitical risks, according to the agency Reuters press. Brent crude is forecast to average $83.93 per barrel in 2024, and US crude is expected to average $79.72.

Where are prices headed?

According to Amarpreet Singh, an analyst at Barclays, “Oil prices have recently converged with our fair value estimates, revealing the underlying strength of fundamentals through a clearing in the fog of war.” Barclays expects Brent crude to remain around $90 a barrel. in the coming months.

Analysts noted that WTI crude futures pared early gains and closed marginally higher on Wednesday, as an unexpected addition to inventories raised concerns about weakening demand in the world’s top oil consumer.

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EIA inventory data released yesterday showed that US crude oil inventories rose by 3.591 million barrels in the previous week, defying market expectations for a three million barrel decline. U.S. gasoline stocks also rose by 2.654 million barrels, but distillate stocks fell by 0.377 million barrels. However, downside remains limited amid escalating conflict in the Middle East, with tensions developing between Israel and Lebanon’s Hezbollah,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.