FED interest rate cut revives interest in oil.

A good week for oil, but in some ways it still seems any rise in prices is papering over the bearish cracks, as many of the price drivers which have taken ICE Brent from $68.75 a barrel 10 days ago to last Friday’s close of $74.72 have little to do with supply and demand but more to do with a few bullish watering holes along the way!

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The Federal Reserve Bank kick started this week’s push to higher prices when in an eagerly awaited announcement and speech by Jerome Powell, the Chairman of the “FED” announced….:

?“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage?backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective”

Whilst investors and oil traders expected a cut in American interest rates of a quarter of a percent, a drop of half a percentage per cent surprised many, so much so that U.S. equities quickly pushed higher taking oil prices along for the ride. The gamble paid off!

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Let’s face it, whilst we in the oil industry talk longingly of a return in consumer demand for physical oil, on Wall Street it remains a “technical commodity” and one which can be dragged along by the herd quite willingly!

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Of course, the FED rate cut wasn’t the only factor involved in oil recovering?its?composure. Escalating geopolitical tensions between Israel and ?Hezbollah certainly brought back the fear factor when it comes to keeping Middle East oil supply flowing. The market remains fearful Iran may try to close the Straits of Hormuz, an Iranian controlled waterway through which just over 20% of the World’s oil supply transits. This equates to roughly 20 million barrels a day (of which 75% travels East.).

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That fear is probably worth at least $1 per barrel of this week’s price rise and we can probably count another dollar for the FED interest higher than expected rate surprise! Another bullish factor this week was a drawdown in U.S.crude oil stocks of 1.6 million barrels with concerns growing of low inventory levels of WTI at?its?homebase in Cushing Oklahoma (Cushing crude oil ?inventories dropped by 2 million barrels week on week). Cushing crude oil stocks are at their lowest level in a year.

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However, one word of caution when getting bullish over these figures, US crude imports dropped by 1.8 million barrels last week thanks to shipping restrictions created by Hurricane Francine, so taking a drawdown in American crude oil stocks as a buy signal may require a little more research than a knee jerk reaction. Overall, the oil market feels relieved to have some bullish stories drop into its lap, but still the underlying platform remains and that is the never ending appearance of the ghost of China keeping a lid on prices, as that country continues to struggle to create strong oil demand again.

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As Oil Price reports so well, China plays a critical role in global oil demand, but its economy shows signs of slowing, and August marked the fifth consecutive month of declining refinery output, reflecting weaker industrial production and consumer demand. While some analysts expect a recovery in Chinese crude oil demand later this year, the current slowdown has limited the potential for a stronger price rally. Traders are closely watching for signs of improvement in China’s economic data, as any further weakening could dampen global demand forecasts.

An improvement in Chinese demand isn’t the only area where those friendly to oil prices have their fingers crossed demand will improve across the board.

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The prospect of Refinery run cuts keeps re-surfacing as yet another reason to be optimistic for oil prices going forward, but that needs to be balanced against annual refinery maintenance (although expected to be light in the 4th quarter) and current petroleum product stock inventories of all grades.?

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Gasoline may have had a resurgent week but those holding high stocks in Europe ready for transit to West Africa remain with a keen eye on gasoline production levels at the Dangote refinery in Nigeria. Distillates have been oversupplied most of the year, although the potential for cargoes to arb to Singapore which may be a contributing factor to ICE gas oil spreads getting into backwardation versus a long held contango. Naphtha has been in demand in the East, but this is nothing new, around 600,000/800,000 mt a month leaves Europe and the Med for Eastern destinations. Jet fuel inventories in America appear high as the summer fades and the vacation season fades with it.

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In summary, the market had a better week this week for sure ( mainly due to the FED interest rate cut), but for this follower it feels like the market bulls are grabbing at straws a little buying against stories which fade all too quickly.

Let’s face it, we all knew a FED rate cut was coming!

The only caveat to that feeling is Sunday’s escalation in the Israel/ Hezbollah conflict which now seems to be moving into a different more dangerous all out war phase, that in itself may see Monday’s markets opening a little stronger.

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This week’s closing guide prices:

ICE Brent 74.72 (+2.64)

WTI 71.00 (+1.78)

ICE gas oil 668.00 (+25.75)

Euro gasoline swaps 713.00 (+37.00)

Euro naphtha swaps 639.00( +11.50)

Nymex gasoline 2.0364 (+9.82 cents per gall)

LPG swaps 576.00 (+12.00)

Opec basket 75.15