Oil hits seven-week high on renewed hopes of US Fed rate cut, Middle East war jitters; Brent is approaching $86/bbl

Crude oil futures hit a seven-week high on Thursday, June 20, as fresh economic data on a cooling U.S. labor market added to expectations that the U.S. Federal Reserve may further cut interest rates earlier this year. Rising conflict in the Middle East, with fears of supply disruptions in the major oil-producing region, also supported the upward trend in prices.

Brent crude futures were last up 78 cents, or 0.9%, at $85.85, having previously touched $85.89, a high not seen since May 1. or 0.9 PERCENT, to $82.27. There was no WTI settlement on Wednesday due to a US public holiday, which kept trading largely light.

Read also: Expert View | OPEC to extend supply curbs to 2 hours; Crude oil seen at $70-90 in 2024: Kotak’s Kaynat Chainwala

The most active August contract rose 60 cents to $81.31, according to Reuters. Turning to domestic prices, crude oil futures last traded 0.91% higher at ₹6,794 per barrel on the multicommodity exchange (MCX).

What determines the price of crude oil?

-The number of Americans filing new claims for unemployment benefits fell last week. Labor market momentum has weakened along with the overall economy as the Federal Reserve tries to control inflation. With that pressure easing, an interest rate cut by the US central bank this year remains on the table.

-This could boost oil prices, which have been dragged down this year by weak global demand. A rate cut by the US would reduce borrowing in the world’s largest economy, boosting appetite for oil as production rises. Oil prices are also likely to remain supported by a rising geopolitical risk premium driven by the Middle East conflict, according to analysts.

-Israeli forces pounded areas in the central Gaza Strip overnight, while tanks deepened their advance into Rafah in the south. However, expectations of building inventories appear to be overshadowing fears of escalating geopolitical stress for now, according to some analysts.

-An industry report on Tuesday showed U.S. crude oil inventories rose 2.264 million barrels in the week ended June 14, while gasoline inventories fell, market sources said, citing figures from the American Petroleum Institute.

-A summer surge in oil demand, refineries and ongoing weather risks, added to extended production cuts by the OPEC producer group, mean that “oil balance sheets should tighten and inventories should start to it drags on in the summer months,” according to JPMorgan commodities analysts.

– Investors also digested the latest decision by the Bank of England, or BoE, to keep the main interest rate unchanged at a 16-year high of 5.25% at its monetary policy meeting ahead of the national election in Great Britain from 4th of July.

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Where are prices headed?

Both benchmarks have risen more than six percent in the past two weeks following the results of the recent OPEC+ meeting and a Ukrainian drone strike that caused a fire at a major Russian port oil terminal. The potential escalation of tensions in the Middle East adds a supply risk to the oil demand equation, according to analysts.

“Israeli tanks advanced deeper into the Gaza Strip city of Rafah on Wednesday, as a senior Israeli official recently warned of an imminent “all-out war” with Lebanon’s Hezbollah. Robust global demand growth forecasts from OPEC, IEA and US EIA, which all predicted stronger consumption in 2H 2024 boosted market sentiment,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.

In China, recent data showed that industrial production in May missed expectations. However, retail sales, a key indicator of consumption, rose at the fastest pace since February. Rising US crude inventories capped further price gains.

“We expect crude oil prices to remain volatile. Crude oil has support levels at $79.65 and $79.10, with resistance at $81.40 and $82.00. In INR terms, crude oil has support at ₹6,650-6,580 and resistance to ₹6,780-6,850,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.