Oil Prices Gain Amid U.S. Production Woes and Rate Cut Expectations

Crude gained on Tuesday following Hurricane Francine disruption in the U.S. and the possibility of an interest rate cut in the U.S.

These two factors have boosted traders’ sentiment in the oil market despite concerns about global demand and slowing growth in China.

Brent crude oil, against which Nigerian oil is priced, rose by 36 cents, or 0.5% to $73.11 per barrel while the U.S. crude oil gained 53 cents, or 0.8% to settle $70.62 per barrel.

Both closed higher in the previous trading session as the market reacted to the impact of Hurricane Francine on U.S. Gulf Coast production.

More than 12% of crude oil production and 16% of natural gas output in the Gulf of Mexico remained offline as of Monday, according to the U.S.

According to the Bureau of Safety and Environmental Enforcement (BSEE), the disruption has raised concerns over short-term supply shortages and contribution to the upward momentum in prices.

Yeap Jun Rong, a market strategist at IG said “while the market is seeing near-term stabilization, the fragile state of China’s economy and anticipation of the U.S. Federal Reserve’s interest rate decision could limit further gains.”

The Federal Open Market Committee (FOMC) is expected to announce a rate cut later this week, with futures markets pricing in a 69% chance of a 50-basis-point reduction.

Lower interest rates are favourable for oil prices as they reduce borrowing costs and encourage economic growth.

“Growing expectations of an aggressive rate cut are lifting sentiment across the commodities sector”, stated ANZ analysts.

The market, however, remains cautious due to lower-than-expected demand from China, the world’s largest importer of the commodity.

Chinese data released over the weekend showed that China’s oil refinery output dropped for the fifth consecutive month in August. This signals weaker domestic demand and declining export margins.