Oil prices rose by 2% on Thursday, fueled by a significant interest rate cut from the Federal Reserve. This move helped the global benchmark, Brent crude, recover from its lowest levels in nearly three years, reached last week.
By 12:19 p.m. ET (1619 GMT), Brent futures climbed to $75.09 a barrel, gaining $1.44, or 2%. This rebound comes after prices fell below $69 a barrel last week. Meanwhile, US crude increased by $1.53, or 2.1%, reaching $72.44 a barrel.
The Federal Reserve announced a half-percentage-point cut in interest rates on Wednesday. Such cuts usually encourage economic growth and boost energy demand. However, analysts noted that this cut may also signal concerns about a weakening US labor market, which could slow down the economy. ANZ analysts remarked, “While the 50 basis point cut suggests tough economic challenges ahead, bearish investors were left dissatisfied after the Fed raised its medium-term outlook for rates.”
In the UK, the Bank of England decided to keep interest rates steady at 5.0%.
Crude prices were further supported by rising tensions in the Middle East, according to Tim Snyder, chief economist at Matador Economics. Recently, walkie-talkies used by the Lebanese armed group Hezbollah exploded, following similar incidents with pagers. Security sources indicated that the Israeli spy agency Mossad was behind these incidents, although Israeli officials did not comment.
Despite these developments, weak demand from China’s slowing economy is limiting oil price gains. Alex Hodes, an oil analyst at StoneX, noted that refinery output in China slowed for the fifth consecutive month in August. Data from the statistics bureau revealed that industrial output growth in China dropped to a five-month low last month, and both retail sales and new home prices weakened.
Citi analysts predict a counter-seasonal oil market deficit of about 400,000 barrels per day (bpd) in the coming quarter, which should help keep Brent crude prices between $70 and $75 a barrel. However, they caution that this situation may only be temporary. “As global oil balances worsen in most scenarios for 2025, we anticipate renewed price weakness, with Brent potentially dropping to $60 per barrel,” Citi noted in their report on Thursday.