Oil prices edged higher in Asian trading on Monday, buoyed by expectations of a U.S. interest rate cut this week. However, gains were limited due to ongoing concerns over global demand and weaker economic data from China.
Brent and U.S. Crude Futures Show Modest Gains
Brent crude futures for November delivery rose by 38 cents, or 0.5%, to $71.99 per barrel by 0700 GMT. U.S. crude futures for October delivery gained 49 cents, or 0.7%, to reach $69.14 per barrel. These increases come after both contracts had settled lower in the previous session, as concerns about supply disruptions eased.
The market was reassured as crude production resumed in the Gulf of Mexico after being disrupted by Hurricane Francine. However, nearly 20% of crude oil production and 28% of natural gas output in the Gulf remain offline in the wake of the storm.
Fed Rate Cut Expectations Drive Market Sentiment
The Federal Open Market Committee (FOMC) is set to meet on September 17-18, and traders are eagerly awaiting the outcome. There is growing speculation that the Federal Reserve will cut interest rates by 50 basis points (bps), rather than the anticipated 25 bps. According to CME FedWatch, investors are increasingly betting on a larger rate cut.
A reduction in interest rates generally lowers borrowing costs, potentially stimulating economic activity and driving up demand for oil. “Markets are focused on upcoming FOMC policy decisions, and traders are likely to stay cautious,” said Priyanka Sachdeva, a senior market analyst at Phillip Nova. She added that despite supply disruptions from the hurricane, concerns about demand are limiting price gains.
However, some analysts believe that an aggressive 50 bps rate cut could signal deeper concerns about the U.S. economy, which may curb oil demand. “A cut of 50 bps from the Fed will likely indicate weakness in the U.S. economy, raising demand concerns for oil,” said Kelvin Wong, a senior market analyst at OANDA.
Chinese Economic Slowdown Casts a Shadow
Adding to the uncertainty, weaker-than-expected economic data from China is also dampening optimism in the oil market. China, the world’s largest oil importer, released figures showing industrial output growth in August had slowed to a five-month low. Retail sales and new home prices also weakened, pointing to a prolonged period of sluggish growth in the world’s second-largest economy.
IG market strategist Yeap Jun Rong highlighted the impact of China’s low-for-longer growth outlook on oil demand. “Optimism in the market was dampened by weaker Chinese economic data released over the weekend, with the low-for-longer growth outlook reinforcing doubts over oil demand,” he said.
Wong of OANDA echoed similar concerns, warning that the current rebound in West Texas Intermediate (WTI) crude might be short-lived. “Coupled with increased odds of a deflationary risk spiral in China after industrial production and retail sales growth declined in August, the current rebound in WTI crude oil is likely unsustainable with intermediate key resistance at US$72.20/73.15 per barrel.”
Outlook Remains Uncertain
While oil prices have been supported by the prospect of lower U.S. interest rates, concerns about demand—especially from major economies like the U.S. and China—continue to weigh heavily on the market. As the FOMC meeting approaches, traders are likely to remain cautious, keeping a close eye on any developments that could sway the balance between supply and demand.
For now, oil prices seem caught between the potential boost from lower U.S. rates and the drag of slower global economic growth, leaving the market on edge as it waits for more concrete signals.
