OIL FUTURES: Crude drops on US Fed’s hawkish tilt; BOJ keeps interest rate steady

Crude oil futures declined in mid-morning Asian trade Dec. 19 after the US Federal Reserve's interest rate cut of 25-basis points and bearishness in the demand fundamentals of the complex.

The Bank of Japan kept its benchmark interest rate steady at 0.25% Dec. 19 following the interest rate cuts by the Fed, with board members opting to take time to further assess the economy of the world's fourth-largest importer of crude.

At 12:11 pm Singapore time (0411 GMT), the ICE February Brent futures contract dropped 41 cents/b (0.56%) from the previous close to $72.98/b, while the NYMEX January light sweet crude contract fell 39 cents/b (0.55%) from the previous close to $70.19/b.

The Fed cut its target interest rate by 25 basis points late Dec. 18 following the final Federal Reserve Open Market Committee meeting for 2024, but said it forecasts fewer rate cuts in 2025 amid expectations of higher inflation.

"I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," US Federal Reserve's Chairman Jerome Powell said at a press conference following the end of the FOMC.

SPI Asset Management's Managing Partner Stephen Innes said Dec. 19, "In a dramatic turn, US stocks and global markets crumbled after the Federal Reserve's latest dot plot iteration, which only penciled in two more cuts, down from four for the coming year. This sent shockwaves of a 'hawkish cut' across trading floors worldwide."

Traders have continued to price in a potential reduction in rate cuts for 2025 amid an ongoing market evaluation of President-elect Donald Trump's protectionist economic proposals that could buoy inflation rates in the US.

"President-elect Trump's hawkish stance on trade, immigration, and taxation injects a potent dose of volatility into the inflation narrative." Innes continued, further toying with the possibility that this could ultimately lead to "financial markets [paring] back expectations for further rate cuts next year to a no-cut 2025 scenario."

The hawkish tilt in the Fed's near-term outlook is likely to lead to the greenback advancing further, and this would result in dollar-denominated assets like oil becoming more expensive to consumers using foreign currencies.

The ICE US Dollar Index stood at 107.83 at 11:20 am Singapore time (0320GMT) Dec. 19, gaining 0.08% on the day and 1.2% since the start of the week.

Furthermore, the front-month Brent-Dubai exchange of futures for swaps contract shrank to its narrowest since September on Dec. 17, pointing to possible arbitrage economics for Atlantic crude barrels to Asia, further weighing on sentiment.

"Prices of several key grades of oil are rising, according to traders in the region. This has seen the gap between the Asian Dubai benchmark and Brent narrow sharply in recent weeks," ANZ research analysts Brian Martin and Daniel Hynes said in a note dated Dec. 19.

Further pressuring Asian oil demand fundamentals, oil-based road fuels, once the mainstay of global oil demand growth, are experiencing unprecedented structural challenges driven by accelerating electric vehicle adoption and stringent decarbonization policies globally.

"The continuing weakness in gasoil and gasoline use reflects a combination of a persistent macroeconomic malaise and longstanding structural substitution trends that are progressively undermining demand for liquid transportation fuels," the IEA said in its latest monthly oil market report.

US crude inventories draw

Lending some support to fundamentals, seasonal US crude inventory declines were extended in the week ended Dec. 13, US Energy Information Administration data showed Dec. 18.

US commercial crude stocks fell 930,000 barrels to 421.02 million barrels during the week, 5.4% behind the five-year average for this time of year.

The draw was directionally seasonal but came in well under market expectations. American Petroleum Institute data released Dec. 17 showed a 4.7 million-barrel draw in the week to Dec. 13, while analysts surveyed by S&P Global Commodity Insights Dec. 16 indicated that stocks declined 1.8 million barrels over the period.

Dubai swaps

The February Dubai swap was pegged at $72.12/b at 10:00 am Singapore time (0200 GMT) Dec. 19, lower by 52 cents/b (0.72%) from the Asian close Dec. 18.

The January-February Dubai swap intermonth spread was pegged at 47 cents/b, steady on the day, while the February-March Dubai swap intermonth spread was pegged at 38 cents/b, narrower by 1 cent/b over the same period.

The February Brent-Dubai exchange of futures for swaps was pegged at 90 cents/b, down 2 cents/b from the previous Asian close.