Will an interest rate cut provide a significant boost to oil prices?

This week, the oil market experienced significant volatility, ultimately recording its largest weekly decline since October of last year. The weak non-farm payroll report further exacerbated concerns about the economic outlook, putting pressure on oil prices.

There are two main factors influencing oil prices: the first is real market events, such as China's economic developments and the Russia-Ukraine conflict; the second is financial news, especially the actions of the Federal Reserve. Fed Chair Jerome Powell indicated at last month's Jackson Hole meeting that the first interest rate cut is expected in September.

This suggests that the rate-hiking cycle, which began in 2022, is coming to an end. A rate cut would lower the opportunity cost of holding commodities, as commodities, unlike bonds and real estate, do not provide yields. As concerns about the economy drive expectations of a 50-basis-point rate cut, could the Fed's actions provide the boost to oil prices that investors are hoping for?

IEA trims 2025 forecast for oil demand growth

Oil futures climbed on Thursday, marking two consecutive sessions of gains as a drop in a key U.S. inflation measure bolstered hopes for interest-rate cuts later this year, which could potentially boost consumer energy demand.

Earlier in the session, prices had dipped following the International Energy Agency's monthly report, which slightly increased its crude demand growth forecast for 2024 but downgraded the outlook for next year.

Market drivers

1. Fed rate cut
Remarks from Federal Reserve Chairman Jerome Powell on Wednesday "gave the bulls hope," according to Gary Cunningham, director of market research at Tradition Energy. Speaking with MarketWatch, Cunningham noted that data released on Thursday further supported the expectation that the Fed interest rates cut.

2. The consumer price index
Thursday’s U.S. government data revealed that the consumer price index dropped by 0.1% in June, the first decline since May 2020 during the peak of the pandemic. "This reinforces the belief that the disinflation trend is ongoing, which could lead the Federal Reserve to consider rate cuts," said Brian Swan, senior commodity analyst at Schneider Electric, in a daily note. "Lower global interest rates could positively influence oil prices, as cheaper credit typically boosts consumer demand."

3. Report from IEA
Traders also analyzed the June oil report from the Paris-based International Energy Agency (IEA) on Thursday. The IEA slightly raised its forecast for oil demand growth in 2024, projecting an increase of 970,000 barrels per day, up from the previous estimate of 960,000 barrels per day. However, the agency expects demand growth in 2025 to slow from an earlier forecast of 1 million barrels per day to 980,000 barrels per day. China was responsible for 70% of global demand growth in 2023, but the IEA anticipates that share will decline to 40% in 2024 and 2025, according to a report from the Kansas City energy team at StoneX, led by Alex Hodes, in their Thursday newsletter.

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