Oil Prices Inch Up on Expectations of Supply Tightening and Fed’s Interest Rate Decision
Oil prices made modest gains on Monday, underpinned by the anticipation of major oil producers maintaining supply cuts and optimism that the Federal Reserve will refrain from raising interest rates, thus avoiding a drag on the U.S. economy.
At 0333 GMT, Brent crude futures for November were up by a mere 3 cents at $88.58 per barrel, while U.S. West Texas Intermediate crude (WTI) futures for October increased by 9 cents to reach $85.64 per barrel.
These slight upticks in Asian trading followed a week where both oil contracts concluded at their highest levels in over six months, having experienced weakness in the preceding two weeks.
Sugandha Sachdeva, Executive Vice President and Chief Strategist at Acme Investment Advisors, observed that the primary driving force behind oil prices has been the expectation of further supply reductions by major oil-producing nations, particularly Russia and Saudi Arabia. However, Sachdeva cautioned that the steady rise in U.S. oil production could cap significant price gains.
Russian Deputy Prime Minister Alexander Novak recently announced an agreement with OPEC partners on the parameters for ongoing export cuts, with an official announcement detailing the planned cuts expected later this week. Russia had already committed to reducing exports by 300,000 barrels per day (bpd) in September, following a 500,000 bpd cut in August. Saudi Arabia is also likely to extend a voluntary 1 million bpd cut into October.
Speaking at the APPEC conference in Singapore on Monday, Russell Hardy, Chief Executive of Vitol, predicted that the global crude market would become less constrained in the next six to eight weeks due to refinery maintenance. However, he noted that supplies of sour crude, characterized by higher sulfur content, would remain tight because of the OPEC+ cuts.
In the United States, job growth showed momentum in August, although the unemployment rate rose to 3.8% and wage increases moderated. This suggested that labor market conditions were cooling, reinforcing expectations that the Federal Reserve would avoid further economic dampening by refraining from raising interest rates this month.
Additionally, unexpected expansion in manufacturing activity in China in August, as indicated by Caixin’s manufacturing PMI survey, has eased some concerns about the economic well-being of the world’s largest oil importer. Beijing’s recent economic support measures, such as deposit rate reductions at major state-owned banks and eased borrowing rules for homebuyers, have also lent support to oil prices.
Nonetheless, investors remain watchful for more substantial efforts to bolster China’s struggling property sector, which has been a significant drag on the country’s economy since emerging from the pandemic.