The Fed Supported Oil Prices

Brent crude prices have seen a 2.0% decline, reaching $75.00 per barrel this week. While this is still a decrease, it could be seen as a stabilisation following a 4% drop in the previous week. Prices hit a low of $72.50 on Wednesday but recovered based on positive data. The potential for a stronger recovery towards $84.00 per barrel may become evident if prices close above $75.00 per barrel on Thursday.

The Federal Reserve (Fed) played a significant role in the recovery. After its meeting on Wednesday, the Fed opted to leave interest rates unchanged at 5.50% but signaled a willingness to make swift interest rate cuts. The dot plot revealed expectations for three interest rate cuts in 2024. Fed Chair Jerome Powell emphasized that the team doesn't anticipate new rate hikes. According to the FedWatch Tool, the probability of interest rate cuts in March jumped to 72.6% from 33.4% recorded on Monday. Additionally, 70.5% of investors believe rate cuts could occur in May, and 70.7% anticipate rate cuts in June. Interest rates are expected to be cut to 4.75% by mid-next year.

U.S. 10-year Treasuries yields dropped to 3.95%, the lowest since July, and the U.S. Dollar lost 1.2%. The S&P 500 broad market index surged by 1.6% to 4731 points, the highest since January 2022.

Oil inventories in the United States contracted by 4.26 million barrels during the week, exceeding the 0.65 million forecast. The U.S. Energy Information Administration (EIA) lowered its Brent crude average price forecast for the first half of 2024 to $84.00 per barrel, compared to their October forecast at $93.00 per barrel. OPEC+ continues to dismiss concerns about demand.

A missile attack by Yemen’s Houthi rebels on an oil tanker under the Norwegian flag had a limited impact on oil prices, which remained practically unchanged on the news. Investors appear accustomed to such incidents not leading to major disruptions in oil supplies. Moreover, despite the 6.0% fall in crude prices over the last three weeks, there were only minimal capital outflows from the specialized ETF United States Oil Fund LP (USO). Withdrawals amounted to $6.7 million compared to almost $140 million in inflows in the two previous weeks.

Even U.S. investors seem skeptical about a sustained downturn in oil prices. With the Fed signaling interest rate cuts, a further drop in oil prices appears unlikely. While unforeseen events could potentially push prices down to support levels of $65.00 or $55.00 per barrel of Brent crude, they could also propel prices upward to $100.00 or more.