London — The growing prospects of the first cut in US interest rates in a decade is expected to put further pressure on oil prices over the coming months at a time when market balances are already tightening.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The US Federal Reserve sent a clear signal to the market at its June 19 meeting, leaving the door open for a rate cut at the end of July amid growing concerns over US economic growth, low inflation and weak US data.
Indeed, with signs of a global slowdown increasing, the world's major central banks have already stopped or slowed interest rate increases, a move likely to support growth in the second half of 2019 and into 2020.
With central banks loosening monetary policy again, the US dollar will likely weaken, helping to prop up commodity prices and particularly dollar-traded oil.
Following the Fed meeting, the dollar touched a three-month low against a basket of currencies, exacerbated by signs that US president Donald Trump may be gearing up for a currency war.
"A decisive shift by the US Federal Reserve back to stimulus mode helped drive stocks higher and bond yields lower," Ole Hansen, Head of Commodity Strategy at Saxo Bank said after last week's Fed meeting.
Brent crude, which is trading some $11/b higher than at the start of the year, has risen by some $4/b since the Fed's meeting, as geopolitical tensions in the Middle East and US stock draws offset demand-side concerns. The benchmark crude contract was trading 1.8% higher at $66.25/b at 1350 GMT in London Wednesday.
A return to monetary easing by lowering interest rates would add to growing expectations of tighter oil market during the second half of this year.
Most market watchers already foresee market fundamentals supporting prices in the coming months, with OPEC and its producer allies expected to extend their production cuts on July 2, demand still relatively healthy, and rising geopolitical risks in the Middle East. Signs of a tailing off in record US shale oil growth rates have also tempered the supply outlook.
"Adding to this is the improved risk appetite from the expected cut in US interest rates and a weaker dollar," Hansen said.
Despite fears that rising trade tensions will hit growth, the International Energy Agency expects world oil demand growth to climb to 1.8 million b/d during the fourth quarter, well ahead of the average of 1.2 million b/d for the year.
HSBC this week said it expects a "sharp seasonal increase" in oil demand during the second half of the year to start shrinking global inventories and supporting prices.
S&P Global Platts Analytics expects Brent to end the year close to $80/b, lifted in part by robust demand from a spike in refining activity as shippers switch to cleaner marine fuel to comply with IMO 2020 rules.
"The Federal Reserve is more likely to have an interest cut this year ... all the signals suggest there will be enough momentum to keep the demand outlook at a reasonable level and GDP growth around the 3.3% mark [in 2019]," Chris Midgley, head of Platts Analytics, told reporters earlier this month at a briefing in London.
Platts Analytics sees global oil demand growth of 1.36 million b/d in 2019.
Financial markets are already pricing in the near certainty of a cut at the next meeting, according to Petromatrix, particularly as President Trump maintains pressure on the Fed to lower rates and keep the US economy buoyant ahead his re-election bid in 2020.
The US central bank may cut interest rates by half a percentage point at its July meeting, Goldman said this week, as US financial conditions would tighten if the Fed now fails to meet Wall Street's expectations.
"For oil, the Fed moving back into easing is bullish in the short term ('buy anything' theme) but bearish long term as it makes it easier to finance US crude oil production and US oil stocks," Petromatrix' Oliver Jakob said last week in a note.
"In our opinion, forecasts of US crude oil production should be revised higher under a scenario of the US Fed re-entering a cycle of interest rate cuts."
As central banks shift towards easing the cost of money, fears over a slowdown in oil demand are offset by a weaker dollar, which particularly supports growth in emerging economies, most of which are key oil importers.
The OECD expects India's economic growth to accelerate to 7.25% in 2019 and 7.50% in 2020, while China's GDP could average 6% next year.
"Non-OECD countries will do better -- partly because the likelihood of higher US interest rates and thus a stronger dollar -- recedes," the IEA said in its latest monthly report.
With oil prices for now, at least, shrugging off threats of geopolitical supply risks to hold at around $65/b, a potential return to cheaper money supplies could prove a tipping point for oil markets to the upside in coming months.
-- Robert Perkins, firstname.lastname@example.org
-- Edited by Jonathan Fox, email@example.com