WTI Oil recovers after revival of Fed’s 50bps cut bets and Hurricane Francine

• WTI oil is recovering from four-month lows on renewed expectations that the Fed may cut interest rates by 50 bps.
• Supply shutdowns from Hurricane Francine ravaging the Gulf of Mexico are another bullish factor.
• WTI is forming bullish short-term reversal patterns on the daily and weekly charts.

The price of West Texas Intermediate (WTI) crude oil is trading around the $69 per barrel level on Friday, as it bounces back from more than four-month lows hit on Tuesday.

If Friday ends positive, it will complete three days in a row for WTI Oil – a bullish reversal pattern known as the Three White Soldiers by market technicians. A Hammer candlestick pattern also appears to be forming on the weekly chart, which, if completed, suggests the possibility of a near-term recovery rally.

Oil rebounds on a mix of resurgent hopes for a more than 50bps (0.50%) cut in interest rates by the US Federal Reserve (Fed) at their upcoming meeting on September 17-18 and expectations of further cuts of mortgage rates in China.

Lower interest rates are positive for oil because they reduce the opportunity cost of holding a non-interest-paying commodity. Lowering China’s mortgage interest rates could help boost China’s struggling economic growth, and China is the largest buyer of oil.

WTI Oil Daily Chart

Hopes of a 50 basis point cut by the Fed have been given new life in the financial media over the past 24 hours, after temporarily collapsing due to the release of strong Consumer Price Index (CPI) inflation data at the beginning of the week.

Renewed market bets for a bigger cut were sparked by an article in The Wall Street Journal (WSJ) in which a prominent Fed watcher, Nick Timiraos, argued that a 50 bps cut was warranted. This was followed by a similar story in the Financial Times (FT) and a speech by former New York Fed president William Dudley, who also called for a half-percent cut. The two-year US Treasury yield fell five points on the news and the USD posted further losses.

WTI Oil is also supported by news of Hurricane Francine, which is devastating the US Gulf of Mexico. An estimated 730,000 barrels of oil per day, or 42 percent of the region’s production, were pumped out Thursday as a result of the shutdowns caused by the hurricane.

Despite these factors, upside for black gold may be limited by a generally negative demand outlook. Both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) cut their forecasts for demand growth earlier this week. This, to a greater extent, overshadows concerns about production disruptions caused by Hurricane Francine and limits the upside to crude oil prices.

The main reason for the negative outlook is the weakening of China’s economy. Recent data showed that China’s crude oil imports were 3.1% lower from January to August 2024 compared to the same period a year earlier. Even with OPEC+ curbing supply, a crude oil glut is expected in 2024. In addition, US demand also remains tepid, according to recent inventory figures.