Oil Prices Surge as Crude Inventories Drop and Fed Cuts Interest Rates
Market Optimism Returns
Oil prices rallied on Wednesday, driven by a decline in U.S. crude inventories and the U.S. Federal Reserve’s decision to cut interest rates. Brent futures climbed 20 cents, or 0.27%, to $73.39 a barrel, while U.S. West Texas Intermediate crude rose 50 cents, or 0.71%, to $70.58.
Inventory Levels and Demand
According to the Energy Information Administration, U.S. crude stocks and distillate inventories fell in the week ending December 13, while gasoline inventories increased. Total product supplied, a key indicator of demand, jumped to 20.8 million barrels per day, up 662,000 bpd from the previous week.
Analysts Weigh In
“The market seems to have turned a corner from the negativity we saw a couple of weeks ago, with more optimism about demand,” said Phil Flynn, a senior analyst for Price Futures Group.
Fed’s Rate Cut and Outlook
The U.S. Federal Reserve’s decision to cut interest rates, as expected, was tempered by its signal to slow the pace of future cuts. This move was influenced by a stable unemployment rate and little recent improvement in inflation. While oil prices initially surged, they retreated in post-settlement trade as the dollar index reached a year-to-date high of 108.156, making oil more expensive in other countries and potentially reducing demand.
Interest Rate Impact
Lower interest rates can boost economic growth and demand for oil by decreasing borrowing costs. However, the Fed’s projection of just two quarter-percentage-point rate reductions by the end of 2025 may have tempered oil investors’ enthusiasm.
Market Reaction
Oil investors had already priced in a 25-basis-point rate cut, and were more focused on the Fed’s outlook for future cuts, according to StoneX analyst Alex Hodes. As a result, the market reaction was muted, with both Brent and U.S. crude futures paring gains and turning negative in post-settlement trade.
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