oil prices

Oil prices experienced a notable increase on Wednesday, as benchmark Brent futures breached the $80 per barrel mark for the first time since May. This surge was triggered by the release of U.S. inflation data, which sparked hopes that the Federal Reserve might scale back its planned interest rate hikes for the world’s largest economy.

The latest U.S. data revealed a modest rise in consumer prices during June, marking the smallest annual increase in over two years. While the market expects another interest rate hike, oil traders are optimistic that this may be the final one. Heightened interest rates can potentially impede economic growth and dampen oil demand.

Naeem Aslam, the Chief Investment Officer at Zaye Capital Markets, described the inflation figures as a positive development, stating, “This is the lowest number since the pandemic… but it is important to keep in mind that this is still a transitory situation. But overall, traders are cheering this event.”

By 1600 GMT, Brent futures had climbed by 91 cents or 1.2%, reaching $80.33 per barrel, after experiencing a rise of over $1 earlier in the trading session. Meanwhile, U.S. West Texas Intermediate (WTI) crude saw an increase of $1.08 or 1.4% at $75.81 per barrel.

Fiona Cincotta, a Senior Financial Markets Analyst at City Index, highlighted that oil prices also received support from a weaker dollar and positive sentiment surrounding Chinese stimulus measures.

Forecasts from both the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) indicate a tightening market throughout 2024.

The IEA expects the oil market to remain tight in the second half of 2023, attributing this to robust demand from China and developing countries, coupled with supply reductions by leading producers. New forecasts from the IEA are anticipated later this week.

PVM analyst Tamas Varga emphasized the impact of supply downgrades and increased demand on the oil market, stating, “The oil balance gets tighter either when supply is downgraded or demand is revised up. If both happen simultaneously, the change can be seismic.” Varga also noted that the EIA’s outlook suggests no concern for an inflation-induced recession that could potentially hamper global oil consumption.

Recently, the top oil producer, Saudi Arabia, pledged to extend a production cut of 1 million barrels per day (bpd) in August, while Russia plans to reduce exports by 500,000 bpd.

On the flip side, oil prices were under pressure due to a U.S. Energy Information Administration report revealing a much larger-than-expected build in U.S. crude stocks, amounting to nearly 6 million barrels last week.

Contrary to analyst expectations of a substantial draw, gasoline inventories remained largely unchanged at 219.5 million barrels during the Fourth of July holiday week, a situation that Price Futures Group analyst Phil Flynn described as “almost unheard of.”

Overall, the surge in oil prices, supported by the inflation data, indicates an optimistic outlook for the industry, while market tightening and supply cuts further contribute to this positive sentiment.

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