Oil steadies amid prospects of further interest rate increases and US reserve build-up

American crude stocks, an indicator of fuel demand, rose by 7.9 million barrels last week, official data shows

An oil pump jack. Higher interest rates could slow the global economy and dampen crude demand. AP

Oil prices were steady on Thursday as prospects of further interest increases by the US Federal Reserve and a build-up in US crude stocks outweighed optimism over China’s economic recovery.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.30 per cent higher at $73.42 a barrel at 12.46pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.29 per cent at $68.47 a barrel.

On Wednesday, Brent settled 1.47 per cent lower at $73.20 while WTI fell 1.66 per cent to $68.27.

“Chinese stimulus measures and sizeable crude import measures from the country helped boost sentiment in oil markets at the start of yesterday, but those gains were eroded later in the session after the [Fed] meeting and a surprise jump in US [crude] stockpiles,” Emirates NBD economists said in a research note.

The US central bank on Wednesday paused its interest rate increases to assess the impact of its inflation-fighting measures on the economy but signalled that it would raise rates again later this year.

“In light of how far we've come and tightening policy, the uncertain lens with which monetary policy affects the economy and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged,” Fed Chairman Jerome Powell said.

Higher interest rates could slow the global economy and dampen crude demand. The Fed has raised interest rates by a combined 500 basis points since March 2022.

“The oil market would have you thinking the economy is in worse shape, but that is not the case right now and the Fed may need to deliver more tightening that sends it quickly into a recession,” said Edward Moya, a senior market analyst at Oanda.

“The Fed is going to have to kill this economy to conquer inflation and that should keep crude prices heavy.”

Meanwhile, US crude stocks, an indicator of fuel demand, rose by 7.9 million barrels last week, according to the US Energy Information Administration.

Analysts had estimated a decline of 500,000 barrels, according to Reuters.

Total petroleum stocks increased by 2.1 million barrels in the week that ended on June 9 and distillate stocks rose by the same amount, the agency's data showed.

Futures rose by as much as 2 per cent on Wednesday after China’s central bank cut a key short-term lending rate for the first time in 10 months following disappointing economic data.

The People’s Bank of China lowered its seven-day reverse repo rate by 10 basis points to 1.9 per cent, from 2 per cent.

Oil prices also received a boost from a Bloomberg report that said the US plans to buy about 12 million barrels of oil this year as it begins to refill its emergency crude reserves.

The figure includes 3 million barrels already scheduled for delivery in August and an additional 3 million barrels from a solicitation, Bloomberg reported, citing sources.

Brent crude surged to about $140 a barrel last year following Russia’s invasion of Ukraine.

That prompted Washington to make the largest sale yet from the strategic petroleum reserve of 180 million barrels, which was part of a strategy to stabilise oil markets and fend off high petrol prices.

Oil is enjoying a healthy “leg-up” after Saudi Arabia's production cut while China appears to be pivoting into stimulus mode and the US moves to replenish its emergency stockpiles, Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG, said in a research note.

“Yet, despite the current optimism, we have placed our constructive oil price trajectory under review,” he said.

The market has underestimated output from sanctioned countries such as Russia, Iran and Venezuela, as well as “robust” releases from the US strategic petroleum reserve over the past year, the Japanese bank said.

“This benign supply picture in part explains why oil inventories – with the exception of stocks on water – have continued to rise, despite the announced Opec+ curtailment,” Mr Khoman said.

The Institute of International Finance said a “modest” rise in global crude demand, combined with Opec+ output cuts, could raise Brent crude prices to $85 a barrel in the fourth quarter of this year, from $77 in the second quarter.

“However, the range of uncertainty over the price of oil remains significant. Downside risks to oil prices include a slower rebound in the Chinese economy, a reversal of gas-to-oil switching and additional efficiency gains for fuel on accelerating electric vehicle sales,” the IIF said in its Capital Flows Report on Wednesday.

The IIF expects global oil demand to rise by 1.7 million barrels per day to 101.4 million bpd this year.

The growth will be mainly driven by emerging Asian economies, with China accounting for 65 per cent of the increase, the report said.

“Oil demand could be broadly flat in the US and Europe. On the supply side, Russian oil and condensates production has proved relatively resilient despite western sanctions,” the IIF said.

On Thursday, Switzerland's largest bank UBS slashed its September and December oil price forecasts by $5 per barrel each, citing higher-than-expected supply from Russia and the US.

“Despite the solid demand recovery, global visible oil inventories did not fall in the first four months of this year because supply growth was also solid,” UBS strategists said.

The Swiss lender also bumped up its US supply forecast by 200,000 bpd after the EIA projected record high production in the country for this year and the next.

UBS said the Saudi production cut of a million bpd and voluntary Opec+ output curbs will widen the oil market deficit to more than 2 million bpd by July, from 1.5 million bpd this month.

“Once these deficits become visible in on-land oil inventories, we expect oil prices to trend higher.”