Oil prices experienced a notable increase of more than 3% on Tuesday, fueled by expectations of rising fuel demand following China’s central bank’s decision to lower a short-term lending rate. This move, the first in 10 months, provided a significant boost to crude prices after a sharp decline in the previous session.
China’s rate cut aims to accelerate the recovery of its economy, which is the second-largest globally and the largest importer of crude oil. As a result, Brent crude futures saw a settlement rise of $2.45, or 3.4%, reaching $74.29 per barrel, while U.S. West Texas Intermediate (WTI) crude experienced a gain of $2.30, or 3.4%, reaching $69.42 per barrel.
The decline in oil prices on Monday, approximately 4%, was partially driven by concerns surrounding the Chinese economy following disappointing economic data released last week.
However, the market rebounded on Tuesday, reflecting a more positive outlook. Phil Flynn, an analyst at Price Futures Group, remarked that Monday’s pessimism was overstated, stating, “It was overdone with doom and gloom on Monday.”
In tandem with the surge in oil prices, equities also experienced an upturn on Tuesday. However, Brent’s six-month backwardation, a market structure indicating shorter-dated futures trading above longer-dated ones, fell to its lowest level since March, standing at approximately $1.10. This decline indicates waning confidence in the potential for demand to surpass supply throughout the year.
Giovanni Staunovo, a strategist at UBS, highlighted that for market participants to regain confidence and establish long positions, substantial inventory declines are needed, a development he expects to occur within the coming weeks.
The market is grappling with the impact of increased global oil supplies alongside concerns regarding demand growth, particularly in light of the upcoming U.S. Federal Reserve policy meeting concluding on Wednesday. Most market participants anticipate the Fed to maintain unchanged interest rates, particularly following data showing minimal growth in U.S. consumer prices throughout May.
The dollar’s strengthened position resulting from the Fed’s rate hikes has made oil more expensive for holders of other currencies. Furthermore, the European Central Bank is expected to raise interest rates on Thursday, adding to the apprehensions surrounding demand.
Worries about demand have overshadowed the temporary price boost derived from Saudi Arabia’s recent announcement of further production cuts scheduled for July. The Organization of Petroleum Exporting Countries (OPEC) kept its forecast for 2023 global oil demand growth steady, signaling a consistent outlook for Chinese demand growth.
Market participants will be closely watching the upcoming monthly report by the International Energy Agency (IEA), scheduled for release on Wednesday, as it is expected to provide additional guidance for trading decisions.
Contrary to the average estimate of a 1.3 million barrel decline, U.S. crude oil inventories reportedly increased by about 1 million barrels in the week ending June 9, according to market sources citing American Petroleum Institute figures on Tuesday. Government data on stockpiles is set to be released on Wednesday, offering further insight into inventory levels.
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