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Oil prices bounce back on Fed hint of rate cut, Mideast flare-up

Crude oil prices have shown significant volatility

International crude oil prices rose on Monday after hitting an eight-month low level last week as an increase in violence in the Middle East prompted worry about supply while in the US the Fed signalled it may start cutting interest rates next month.

The dramatic price resurgence came as Morgan Stanley revised its oil price forecasts downward, reflecting expectations of increased supply from Opec and non-Opec producers amid signs of weakening global demand, the bank said in a report this week.

Brent crude futures climbed $2.28, or 2.89 per cent, to $81.30 a barrel by 10:30am ET (1430 GMT), while US crude futures were at $77.30 a barrel, up $2.47, or 3.3 per cent. According to analysts, a contributing factor for the latest moves in oil prices may also have been global supply, which has declined to a two-year low, with OECD stocks in particular much lower than the ten-year seasonal average, at minus 120 million barrels or 4.0 per cent. US oil inventories have been on the decline for several weeks in a row.

In a further boost for prices this week, the chairman of the U Federal Reserve Jerome Powell hinted that an interest rate cut is definitely on the table for the central bank’s next monetary policy meeting, in September.

“The time has come for policy to adjust,” Powell said on Friday at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” the Fed’s chairman added.

Analysts said that crude oil prices have shown significant volatility, rebounding from recent lows due to short-covering. The anticipation of a potential rate cut by the US Federal Reserve is providing support for crude oil prices at lower levels.

According to experts, crude oil prices have recovered in response to better-than-expected US existing home sales data. The US weekly inventory data released on Wednesday also supported crude oil prices, as crude oil, gasoline, and distillate stocks declined more than anticipated.

‘’However, concerns over Chinese demand and the possibility of a ceasefire in the Israel-Hamas conflict are capping the gains in crude oil prices. We expect crude oil prices to remain volatile.

Morgan Stanley has revised its oil price forecasts downward, reflecting expectations of increased supply from OPEC and non-OPEC producers amid signs of weakening global demand, the bank said in a report this week. The firm now anticipates that while the crude oil market will remain tight through the third quarter, it will begin to stabilize in the fourth quarter and potentially move into a surplus by 2025.

The adjustment comes as Morgan Stanley lowers its global oil demand growth estimate to 1.1 million barrels per day (bpd) for 2024, down slightly from its previous forecast of 1.2 million bpd. This revision is driven by multiple factors, including a slowdown in production growth from key non-OPEC countries such as the U.S. and Brazil. However, despite the downward revision in demand, the firm notes that these adjustments have actually marginally tightened the overall supply-demand balance for the remainder of the year.

Morgan Stanley had expected Brent crude prices to remain in the mid-$80s per barrel throughout the third quarter of 2024. However, recent market dynamics suggest that traders are already pricing in anticipated supply increases and demand softness expected in 2025. Consequently, the firm has cut its Brent price forecast for the fourth quarter to $80 per barrel, down from $85, and now expects prices to gradually decline to $75 per barrel by the end of 2025, slightly lower than their previous estimate of $76.

China’s economic slowdown has been a significant factor in this revised demand outlook. Morgan Stanley highlights several contributing elements, such as a surge in sales of LNG-powered trucks, which are displacing traditional diesel fuel, alongside the growing adoption of electric vehicles. Additionally, the firm points to slower growth in demand for petrochemical feedstocks as another reason for the lower demand growth estimate.

While current spot market conditions remain tight, Morgan Stanley’s analysis indicates that oil market participants are increasingly looking ahead to the anticipated softening in the latter part of 2024 and beyond. This shift in market sentiment underscores the cautious approach being taken by investors and industry stakeholders, who are preparing for a potential rebalancing of supply and demand dynamics in the coming years.