Oil Prices Surge Ahead of Fed's Interest Rate Decision Amid Sanctions Announcements
Global oil markets experienced an increase mid-week as expectations of a Fed rate cut in the U.S. and potential supply impacts from tighter sanctions against Russia were priced in. Brent crude oil rebounded from a two-day decline, rising over 1.5% today to around $73.5, having found support after dipping to $72.23 yesterday. U.S. WTI crude also recovered, reaching the $70 range again after falling to $68.8 yesterday.
Analysts are looking for clues regarding interest rates for 2025 following the FOMC meeting. IG market strategist Yeap Jun Rong noted that additional sanctions from the West could help limit some losses, but a cautious atmosphere persists ahead of the FOMC meeting. Yeap added that oil prices could remain limited within current ranges until the end of the year, anticipating low price movement.
Rate cuts could boost the economy and oil demand. The Fed is expected to implement a rate cut for the third time since starting its policy easing cycle. Lower interest rates could stimulate economic growth by reducing borrowing costs, which in turn may increase oil demand. Priyanka Sachdeva, a senior market analyst at Phillip Nova, emphasized that expectations for rate cuts in 2025 are being reassessed, particularly in light of Trump’s plans for a return on January 20. Sachdeva mentioned a narrative suggesting that Trump’s policies could lead to inflation, which, coupled with concerns about potential violations of the Fed's autonomy, has prompted oil investors to adopt a cautious stance.
Meanwhile, the European Union approved a 15th sanctions package against Russia due to its invasion of Ukraine, adding 33 ships carrying Russian crude oil or petroleum products to its shadow fleet. The UK also sanctioned 20 ships transporting illegal Russian oil. These new sanctions could increase volatility in oil prices, but so far have failed to exclude Russia from global oil trading.
U.S. crude oil inventories fell. According to data from the American Petroleum Institute released on Tuesday, crude oil inventories decreased by 4.69 million barrels for the week ending December 13. Gasoline stocks increased by 2.45 million barrels, while distillate stocks rose by 744,000 barrels. Analysts surveyed by Reuters projected that U.S. energy companies withdrew about 1.6 million barrels of crude oil from storage during the same week.
China's oil demand is no longer driving global demand. According to Commerzbank (CBKG), the days when China's demand led global oil consumption may be over. Based on assessments from the country’s largest oil producer, demand for oil products is expected to peak in 2023. A 1.3% decline in oil product demand is anticipated in 2024, bringing it down to 394 million tons. By 2035, the bank predicts that oil product demand in China could fall by 25-40% from 2023 levels, with gasoline and diesel demand expected to decrease by 50% due to electric vehicles.
Data from the National Bureau of Statistics of China indicates that the country processed 58.5 million tons of crude oil in November, marking the lowest level in the last five months. While the crude oil processing amount in November was higher than the same period last year, total crude oil processing for the first 11 months of the year was 649 million tons, which is 1.8% lower than the same period last year.
As a result, China appears to be on the verge of recording its second annual decline in crude oil processing within two years. The previous decline was attributed to coronavirus restrictions, whereas this time the downturn is believed to be structural in nature.