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

Crude oil futures hit a seven-week high on Thursday, June 20, as fresh economic data on a cooling US jobs market added to expectations that the US Federal Reserve could still cut interest rates sooner this year. Escalating conflict in the Middle East with fears of supply disruption in the major oil-producing region also supported the price uptrend.

Brent crude futures were last up 78 cents, or 0.9 per cent, to $85.85, having earlier hit $85.89, a high not seen since May 1. US West Texas Intermediate (WTI) futures for July, which expire on Thursday, gained 70 cents, or 0.9 PER CENT, to $82.27. There was no WTI settlement on Wednesday because of a US public holiday, which kept trading largely subdued. 

Also Read: Expert View | OPEC to extend supply curbs till 2H; Crude oil seen at $70-$90 in 2024: Kotak's Kaynat Chainwala

The more active August contract was up 60 cents at $81.31, according to Reuters. Coming to domestic prices, crude oil futures last traded 0.91 per cent higher at ₹6,794 per barrel on the multi commodity exchange (MCX).

What's driving crude oil prices?

-The number of Americans filing new claims for unemployment benefits fell last week. Labour market momentum has declined with the overall economy as the Federal Reserve tries to tame inflation. With that pressure now subsiding, a rate cut by the US central bank this year remains on the table.

-That could bolster oil prices, which have been dragged down this year by lacklustre global demand. A rate cut by the US would make borrowing cheaper in the world's largest economy, galvanising the appetite for oil as production picks up. Oil prices are also likely to remain supported by a growing geopolitical risk premium driven by conflict in the Middle East, 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 an inventories build appear to be overshadowing fears of escalating geopolitical stress for now, according to some analysts.

-An industry report released on Tuesday showed that US crude stocks rose by 2.264 million barrels in the week ended June 14 while gasoline inventories fell, market sources said, citing American Petroleum Institute figures.

-A summer uptick in oil demand, refinery runs and ongoing weather risks added to extended production cuts by the OPEC producer group mean that "oil balances should tighten and inventories should begin to draw during the summer months", as per JPMorgan commodities analysts.

-Investors also digested the latest Bank of England's or BoE decision to keep its main interest rate unchanged at a 16-year high of 5.25 per cent in its monetary policy meeting ahead of Britain's national election on July 4.

Also Read: Built-in capacity to targets: Why OPEC+ members clash over oil production capacity—Explained

Where are prices headed?

Both benchmarks have surged more than six per cent over the past two weeks, driven by outcomes from the recent OPEC+ meeting and a Ukrainian drone strike causing a fire at a major Russian port oil terminal. The potential escalation of tensions in the Middle East is adding supply risk to the oil demand equation, according to analysts.

‘’Israeli tanks advanced deeper into the Gaza Strip city of Rafah on Wednesday, while a top Israeli official recently warned of an impending “all-out war” with Lebanon’s Hezbollah. Robust global demand growth forecasts from OPEC, the 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 May's industrial output lagged expectations. However, retail sales, a key indicator of consumption, grew at the fastest rate since February. The rise in US crude stocks limited further gains in prices.

‘’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 at ₹6,780-6,850,'' said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.