Oil sits 2% higher after US Fed chair Powell signals rate cuts; Brent nears $80

International crude oil prices settled two per cent higher in the previous session after hitting an eight-month low level during the week after US Federal Reserve Chairman Jerome Powell indicated that the ‘time has come’ for the central bank to change its policy and cut interest rates, while addressing the Jackson Hole Symposium in Wyoming on August 23.

Brent crude futures settled by $1.80, or 2.33 per cent, at $79.02 a barrel. US light crude oil or US West Texas Intermediate (WTI) crude futures finished up $1.82, or 2.49 per cent, at $74.83. Regarding domestic prices, crude oil futures settled 2.11 per cent higher at ₹6,288 per barrel on the multi commodity exchange (MCX).

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What’s driving crude oil prices?

-Analysts said that the pivot by the Federal Reserve is real and is impacting all commodities. During the week, both benchmarks hit their lowest since early January after the US government sharply lowered its estimate of jobs employers added this year through March, raising fears of a possible recession.

-On Friday, Powell endorsed easing the Fed’s policies, saying further cooling in the job market would be unwelcome. He also expressed confidence inflation was within reach of the US central bank’s two per cent target.

-“The upside risks to inflation have diminished. And the downside risks to employment have increased,” Fed chair Powell said in a highly anticipated speech at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. 

-“The time has come for policy to adjust. 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,” added Powell in his speech.

-The US dollar index softened to about 101.45 ahead of the speech. A cheaper greenback typically lifts demand for dollar-denominated oil from investors holding other currencies. Morgan Stanley said in a note on Friday that a drawdown in oil inventories has somewhat supported oil prices.

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-“For now, the balance in the oil market is tight, with inventories drawing approximately 1.2 million barrels per day in the last four weeks, which we expect will continue in the balance of [the third quarter],” the bank said.

-Recent data from China, the top oil importer, has pointed to a struggling economy and slowing oil demand from refiners. A renewed push for a ceasefire in Gaza between Israel and Hamas has also helped ease supply worries and weighed on oil prices.

-US and Israeli delegations started a new round of meetings in Cairo on Thursday to resolve differences over a truce proposal. Ceasefire talks to stop the war in Gaza have reduced fears the conflict would impact crude oil supplies.

-US energy firms cut the number of oil and natural gas rigs operating for a second week in a row, said energy services firm Baker Hughes. This week, the number of oil rigs remained unchanged at 483, while the number of gas rigs fell by one to 97.

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Where are prices headed?

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. Crude oil is expected to find support at $72.10-$71.40 and face resistance at $73.60-$74.50. In INR terms, crude oil has support at ₹6,080- ₹6,010, with resistance at ₹6,230- ₹6,310,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.