Oil prices inch down amid slowing US inflation rate and Fed rate cut hopes

Oil prices gave up gains and settled lower on Friday amid signs of easing inflation and hopes of strong summer fuel demand in the US, and rising expectations for a Federal Reserve interest rate cut in September.

Brent, the benchmark for two thirds of the world’s oil, shed 0.43 per cent to close at $85.03 a barrel. West Texas Intermediate, the gauge that tracks US crude, declined 0.50 per cent to $82.21 a barrel.

Both contracts gained in the prior two sessions. For the week, Brent and WTI retreated 1.7 per cent and 1.1 per cent, respectively.

“The near-term slump in the US dollar should provide some help for commodities, including oil, if only briefly," said Edward Bell, senior director of market economics at Emirates NBD.

Investor confidence was boosted after data on Thursday showed inflation in the US continued to ease in June as the headline consumer price index fell to 3 per cent year on year, down from 3.3 per cent a month earlier and lower than markets had been expecting.

On a monthly basis, the CPI index declined by 0.1 per cent, after it remained unchanged a month earlier. Core inflation was also slower than expected at 3.3 per cent, down marginally from 3.4 per cent recorded for May.

This raised hopes that the Fed will cut interest rates soon. Lower rates are expected to boost economic growth, which would help raise fuel consumption.

Easing inflation also weighed on the US dollar, making commodities more attractive for overseas buyers.

While Fed chairman Jerome Powell acknowledged the slowing inflation, he told law makers that more data was needed to strengthen the case for rate cuts.

Oil prices have increased this year as Opec+ reined in production to tighten the market, offsetting supply increases from nations outside the group.

The group predicted that worldwide crude consumption will expand by more than 2 million barrels a day this year, although the International Energy Agency has a more cautious view.

Based on current policies, strong demand from rapidly growing Asian economies and the aviation and petrochemicals industries will increase oil consumption in the coming years, the IEA said in a report this week.

However, these increases will be offset by rising electric car sales, improved fuel efficiency, reduced use of oil for electricity generation in the Middle East, and structural economic shifts, the report added.

Total supply capacity is expected to increase to nearly 114 million barrels per day by 2030, surpassing the projected global demand by 8 million barrels per day, the Paris-based agency said.

Spare capacity at such levels could have “significant” consequences for oil markets, including for Opec members and the US shale industry, the report added.

“The IEA lowered its oil demand estimate for 2024 by 140,000 barrels per day thanks to a downwards revision to Asian demand as it estimates that China’s consumption decline in the second quarter,” Mr Bell said.

“The IEA expects overall demand growth of 0.97 million bpd in 2024 and a similar level in 2025 as the decline in OECD consumption is set to accelerate.”

Indications of strong summer fuel demand in the US also propped up prices.

US fuel demand was at 9.4 million bpd in the week ending July 5, the highest for the week that includes the Independence Day holiday since 2019, government data showed on Wednesday.

Jet fuel demand on a four-week average basis was also at its strongest since January 2020.

The strong demand encouraged US refiners to ramp up activity and draw from crude oil stockpiles.

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