Crude oil rises on US Fed rate cut expectations, defying oversupply concerns

Crude oil prices jumped last week due to expectations of a positive trade sentiment, albeit temporarily, despite weak demand and oversupply forecasts for the calendar year 2024 and 2025. Traders expressed concerns about the sustainability of this trend ahead of the crucial Forward Open Market Committee (FOMC) meeting scheduled for this week, where the United States Federal Reserve (US Fed) is expected to cut interest rates by at least 25 basis points (bps) to balance inflation and unemployment rates without compromising economic growth.

Data compiled by Polymerupdate Research showed that the benchmark Brent crude futures for near-month delivery on the InterContinental Exchange (IEX) rebounded from a monthly low to record a weekly gain of 4.74 percent, or US$ 3.37 a barrel at the close on Friday, with prices holding firm almost every day. Brent futures started their recovery from a low of US$ 71.12 a barrel the previous week, and gradually rose to US 74.49 a barrel on Friday, the highest level since November 15, 2024.

Similarly, the West Texas Intermediate (WTI) futures for near-month delivery on the New York Mercantile Exchange (Nymex) rallied steadily over 6 percent, or US$ 4.09 a barrel, to close at US$ 71.29 a barrel last week, up from US$ 67.20 a barrel at the end of the previous week. Despite weak trade sentiment, crude oil prices surged last week. Traders anticipate that the Chinese government will announce another supplementary stimulus package to boost consumption and support economic growth.



US Fed’s rate cut hope
The United States Federal Reserve (US Fed) has cut rates by 75 bps over the past two Forward Open Market Committee (FOMC) meetings and is now expected to cut another 25 bps when the economic policy decision making body meets next on December 18. The long-run expectation for the Fed funds is around 3 percent.

With the ceiling rate currently at 4.75 percent, they have room to play with as they move policy from restrictive territory closer to neutral. However, analysts keep an eye on their new economic forecasts though with President-elect Donald Trump’s policy thrust of immigration controls, tariffs and personal and corporate tax cuts likely to mean the Fed signals a shallower, slower path of easing through 2025.

James Knightingly, Chief International Economist (United States), ING Economics, commented, “The market will also be focusing on the US Fed’s statement for the calendar year 2024 and forecast for 2025. However, it is certain that the growth and inflation are set to be revised a little higher for end-2024 while unemployment will be nudged lower, but we aren’t expecting them to dramatically shift their 2025 forecasts. The near-term growth story is being lifted by the election clarity and a sense that Trump’s pro-business regulatory stance coupled with a low tax environment should be supportive. There is some nervousness in the market regarding the potential impact of trade protectionism and immigration controls.”



Supply outpacing demand
Early December, the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) coalition decided to extend the ongoing crude oil production cut to the tune of 2.2 million bpd till March 2025, citing subdued demand growth and production boost from non-OPEC+ countries. OPEC+ forecasted in its monthly report titled ‘Oil Market Report (OMR)’ the world crude oil demand growth forecast for 2024 at 1.6 million bpd, year-on-year, revised down by 210,000 bpd from last month’s assessment, said a report from OPEC+ coalition. Downward revisions to the Organisation for Economic Co-operation Development (OECD) Americas and OECD Asia Pacific were partly offset by an upward revision to OECD Europe oil demand. In the non-OECD, downward revisions were made to China, India, other Asia, the Middle East and Africa.

The alliance estimates global oil demand growth at 1.4 million bpd yoy for 2025, a slight downward adjustment of 90,000 bpd, marking a healthy growth level compared to pre-pandemic averages. Most of this downward revision is in the July-September 2025, given the downward revision of 2024 and generally lower demand growth in 2025 compared to 2024. Total world oil demand is anticipated to reach 106.9 million bpd in October-December 2025 and 105.3 million bpd in 2025.

Meanwhile, the International Energy Agency (IEA) said in a report that even if OPEC+ keeps its oil production as-is for the whole of 2025, there would still be a supply surplus of 950,000 bpd next year. The IEA's latest forecasts of market balances exclude higher supply from the group due to the uncertainty of the OPEC+ supply next year. If OPEC+ does begin unwinding the voluntary cuts from the end of March 2025, this glut would swell further.

Additionally, an analyst with the global financial services company, Bank of America (BofA), forecasted crude oil prices to decline by 10 percent in the calendar year 2025 due to wave of supply from non-OPEC+ nations that will outpace demand. According to reports, global supply is likely to grow by 1.4 million bpd, led by non-OPEC+ producers such as the United States, Argentina, Brazil, and Guyana. While demand is forecast to rise by just 0.8 million bpd amid a slowdown in global economic growth. All international agencies including OPEC+, the International Energy Agency (IEA), etc. have forecasted the world crude oil market to witness oversupply in the calendar year 2025.

Geopolitical concerns
According to a report from Goldman Sachs the People's Bank of China (PBoC) ‘may even increase demand for alternative commodities during periods of local currency weakness to boost confidence in their currency.’ Pledges by leading officials from the Asian nation to raise the budget deficit ratio, cut interest rates and lower reserve requirements for banks are stoking hopes that the world's second-biggest economy will counter slowing domestic growth and potential trade frictions with the incoming Trump administration. Hopes are alive following earlier hints from the Politburo, the country's top decision- making body, that bolder stimulus would be forthcoming.

Meanwhile, missile attacks between Russia-Ukraine, and Israel-Hamas-Hezbollah, continued with each side using most modern warheads to attack one another. Recently, an Israeli strike killed at least 30 Palestinians and wounded 50 others who were sheltering in a post office in the central Gaza Strip, bringing the death toll on Thursday in the enclave to 66. On the other hand, the speculations that US President-elect Donald Trump's tariff policies could lead to inflation might convince the Fed to adopt a more cautious stance on cutting interest rates. This, in turn, could act as a headwind for non-yielding assets.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com