Oil prices extended their gains on Thursday after breaching the $80-mark for the first time since April, as a sharp cooling in US inflation sparked hopes that the US Federal Reserve will ease off from further aggressive interest rate increases.
Brent, the benchmark for two thirds of the world’s oil, was trading 0.30 per cent higher at $80.35 a barrel at 10.40am UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 0.21 per cent at $75.91 a barrel.
On Wednesday, Brent settled 0.89 per cent higher at $80.11 a barrel while WTI was up 1.23 per cent at $75.75.
“Anything that could enable a soft landing in the US is good for oil prices,” said Craig Erlam, senior market analyst at Oanda.
“Brent was already trending higher though and is now at its highest point since April, having already broken out of the range it traded within for the last couple of months.”
The US consumer price index rose 3 per cent year-on-year in June, the smallest increase since March 2021, and down from 4 per cent in May, data released by the Labour Department on Wednesday showed.
Core inflation – which excludes food and energy – increased by 0.2 per cent last month, the lowest one-month gain since August 2021.
Earlier this month, the Fed hit pause on raising interest rates for the first time since it started its monetary tightening cycle in March 2022, as it assesses the effect on the economy.
The Fed signalled it would resume raising rates again this year if needed. Its next meeting will be held on July 25 and 26.
“The Fed is still likely to press ahead with a resumption in hiking at its upcoming meeting given that much of the slowdown has come from more favourable energy prices compared with the spike seen last year following the Russian invasion of Ukraine,” Emirates NBD analysts said in a research note.
High interest rates can dampen economic growth, lowering crude demand.
Meanwhile, US crude stocks, an indicator of fuel demand, rose by 5.9 million barrels to 458.1 million barrels in the week ending July 7, according to the US Energy Information Administration.
Analysts polled by Reuters were expecting an increase of 500,000 barrels.
Petroleum stocks fell slightly last week, while distillate stockpiles rose by 4.8 million barrels, EIA data showed.
Analysts have said that oil prices may have found a floor following the announcement of output cuts by Saudi Arabia and Russia.
Earlier this month, the world’s largest crude exporter said it would extend its voluntary output cut of a million barrels per day until August.
Russia will also cut its oil supplies by 500,000 bpd next month on top of the output reductions that have already been announced.
Meanwhile, the Opec+ alliance of 23-oil producing countries will keep its current production curbs in place until the end of 2024.
Opec’s monthly oil market report is due to be released later today.
“Oil’s renaissance has taken Brent back north of $80 a barrel, as indications mount that the long-held view of a tightening in the [second half of 2023] is beginning to materialise through higher prices,” said Ehsan Khoman, head of commodities, ESG and emerging markets research, at MUFG.
“With this, despite an encouraging US CPI print for June this week, alongside persistently robust data on labour-market strength, the tentative signs that oil prices are quietly rebounding does add to reasons for the Fed to maintain its hawkish settings for a while longer.”
The oil market is set to widen “significantly” in the second half of 2023 on Opec+ supply cuts, according to MUFG. Brent crude would likely be in “the upper-end of the $75 to $85 price range” later this year, it said.
The oil market may be in the early stages of a supply-constrained “supercycle”, with the “scarcity premium” warranting higher crude prices, Mr Khoman said.
Norbert Rucker, head of economics and next-generation research at Julius Baer, said that China’s oil market impact is “less price bullish than often perceived.”
This is due to the “swift” electrification of road transport and economic challenges rooted in the country’s property market, Mr Rucker said in a research note on Wednesday.
China’s economy, which rebounded after lifting Covid-19 restrictions at the start of the year, lost momentum in May, posting weaker retail sales and manufacturing output while registering a slowdown in the property sector.
