Oil Prices Start the Week With a Gain on Rate Cut Hopes

Crude oil prices started the week with a gain, buoyed by expectations that the U.S. Federal Reserve will announce an interest rate cut at its meeting starting tomorrow and concluding on Wednesday.

Prices were also supported by the ongoing disruption in Gulf of Mexico oil production due to Hurricane Francine. As of now, approximately 25% of oil production and 28% of natural gas production remain offline after the hurricane made landfall in Louisiana last Wednesday.

While there were reports of a potential new attempt on the life of Republican presidential candidate Donald Trump, this news had minimal impact on oil prices. The incident received limited media coverage and the swift response from the Secret Service prevented any significant effect on market movements or the dollar.

Brent crude oil recovers

Brent crude oil futures’ prices are still bouncing off their 68.53 low, a level last seen in November 2021, as the latest CFTC Commitment of Traders (COT) report shows that traders are the least bullish oil in over a decade (see here).

The 5 and 21 August lows at 74.97-to-75.24 represent the next upside targets but are likely to thwart the current bounce, at least temporarily. Having said that, immediate upside pressure will be maintained while Monday’s low at 71.18 underpins, together with the 9 September low at 70.51.

Below last week’s 68.53 low lie the mid-May, August and November 2021 lows at 65.74-to-64.52.

Expectations of a U.S. interest rate cut

Oil prices rose in Asian trade on Monday amid expectations of a U.S. interest rate cut this week. Lower interest rates typically reduce the cost of borrowing, which can boost economic activity and lift demand for oil.

However, analysts are concerned that an aggressive rate cut of 50 bps could signal underlying recession worries, which would be a bane for demand.

"A cut of 50 bps from the Fed will likely indicate weakness in the U.S. economy, raising demand concerns for oil," said OANDA senior market analyst Kelvin Wong in an email.

Optimism in the market was dampened by weaker Chinese economic data released over the weekend, with the low-for-longer growth outlook in the world's second largest economy reinforcing doubts over oil demand.

Oil demand in China declined

China's latest economic data points to more challenges for oil demand. Industrial output in August grew by 4.5%, a figure Chinese media hailed as evidence of steady progress. However, Western media emphasized that this marks the slowest growth in five months.

Similarly, retail sales saw an uptick in August, though weaker than expected, reinforcing calls for stronger economic stimulus. Reuters noted that this increases the likelihood of more aggressive measures, while Bloomberg quoted Commonwealth Bank of Australia analyst Vivek Dhar, who suggested Beijing could once again expand its state budget deficit, as it did in October last year, to stimulate growth.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.