On Friday, U.S. stock and energy markets retreated from the significant gains they experienced following the Federal Reserve’s announcement of its first interest rate cut in four years. The central bank reduced rates by a larger-than-usual half percentage point. Fed Chair Jerome Powell described this substantial cut as a “recalibration” of policy, indicating it was not intended to stave off a recession.
Following the announcement, the S&P 500 surged by 2.0%, while the Nasdaq Composite rose by 2.9%. The Dow Jones Industrial Average increased by 1.48%, and the Russell 2000 Index added 2.2%. In the energy sector, the Energy Select Sector SPDR Fund gained 2.1%, supported by a rally in oil prices.
Oil prices are on track for their biggest weekly increase since February, spurred by the Fed’s interest rate cut and ongoing tensions in the Middle East. As of Friday afternoon, Brent crude for November delivery was priced at $74.76 per barrel, up from $71.80 the previous week. West Texas Intermediate crude for October delivery traded at $72.35 per barrel, rising from $68.84. This rally began last week, largely driven by overly pessimistic positions taken by money managers.
Recently, oil markets faced a wave of macroeconomic concerns that affected pricing, compounded by aggressive hedging by banks. This bearish sentiment among traders pushed crude oil positions to the lowest levels since the 2008 financial crisis. Analysts at Standard Chartered noted that this extreme negativity may create upward pressure on oil prices, as speculative positioning calls for a potential short-covering rally. Ole Hansen, head of commodity strategy at Saxo Bank, stated that prices below $70 per barrel required a recession to be justified, a risk that the Fed’s rate cut has alleviated.
In the energy sector, electric vehicle manufacturer Tesla Inc. saw the largest gain, rising 7.3%. The lower interest rates are expected to benefit car manufacturers by making financing more affordable, which could enhance demand and lessen the need for price cuts. However, increased competition, particularly from Chinese EV makers, has negatively impacted Tesla’s profits. In July, Tesla reported a 43% drop in Q2 earnings, with earnings per share at 52 cents, despite a 2% increase in quarterly revenue to $25.5 billion.
Major oil companies also experienced stock increases following the rate cut: Exxon Mobil Corp. rose by 2.4%, Chevron Corp. gained 1.7%, Marathon Oil increased by 1.7%, Shell Plc went up 1.5%, and BP Plc climbed by 2.3%.
Typically, interest rate cuts boost economic activity and energy demand. However, Wall Street analysts caution that these effects may take time to materialize due to current global economic weaknesses. Giovanni Staunovo, an analyst at UBS, commented that while U.S. rate cuts have improved market sentiment and weakened the dollar, it takes time for these cuts to translate into economic growth and increased oil demand.
Looking ahead, the outlook for oil prices remains positive. Standard Chartered forecasts an oil supply deficit in the coming months, particularly as September is expected to be the tightest month of the year due to seasonal demand and supply disruptions in Libya and the U.S. Gulf. Analysts believe that Libyan oil production will take longer to stabilize than the market anticipates. Currently, Libyan crude oil exports are approximately 550,000 barrels per day, about half of pre-crisis levels.
Additionally, Russia, Iraq, and Kazakhstan have submitted compensation plans to OPEC for overproduced crude volumes from the first half of 2024. Standard Chartered estimates that these compensation schedules, combined with a recent reduction in production targets, will result in OPEC’s output being 530,000 barrels per day lower in Q4 2024, and further reductions in early 2025 if commitments are honored.
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