Oil rises on expectations of Federal Reserve rate cut, another US crude drawdown

[NEW YORK] Oil prices rose about 2 per cent to a two-week high on Tuesday on optimism the US Federal Reserve will cut interest rates this week for the first time in more than 10 years, boosting demand expectations in the world's biggest oil user.

Meanwhile, ahead of weekly data, crude oil inventories in the United States were forecast to have dropped for a seventh straight week.

On its second-to-last day as the front-month contract, Brent futures for September delivery gained US$1.01, or 1.6 per cent, to settle at US$64.72 a barrel, while US West Texas Intermediate (WTI) crude gained $1.18, or 2.1 per cent, to settle at US$58.05.

That put both contracts up for a fourth day in a row to their highest closes since July 15.

For the month, however, both contracts were still set to decline due to lingering worries about oil demand with Brent down over 2 per cent and WTI down less than 1 per cent.

US crude futures for delivery in December 2019 traded near the biggest premium to futures for delivery in December 2020

in about two months at US$3.15 a barrel. Oil producers have been selling the back end of the curve as they hedge future output, leading to the spread widening, traders and brokers said.

"Crude oil moved higher today partly due to anticipation of another meaningful inventory draw this week along with tensions that remain escalated in the Strait of Hormuz," said Brian Kessens, senior portfolio manager at energy investment manager Tortoise, noting "the prospect of lower rates and US-China trade talks are buoying economic prospects."

US central bankers began their two-day meeting on Tuesday and were expected to lower borrowing costs for the first time since the depths of the financial crisis more than a decade ago.

"Regarding the Fed, the market has priced in a 25 basis-point cut for Wednesday," Harry Tchilinguirian, global oil strategist at BNP Paribas in London, told the Reuters Global Oil Forum.

US President Donald Trump called on the Federal Reserve to make a large interest rate cut, saying he was disappointed in the central bank and that it had put him at a disadvantage by not acting sooner.

Economic growth in the United States slowed less than expected in the second quarter, strengthening the outlook for oil consumption, but elsewhere, disappointing economic data has increased concerns about slower growth.

In the United States, analysts forecast crude stockpiles dropped by 2.6 million barrels last week, according to a Reuters poll. The American Petroleum Institute (API), an industry group, is due to release its inventory report at 4.30pm EDT (2030 GMT), followed by US government data on Wednesday morning.

If correct, that decline would put crude stocks down for a seventh week in a row for the first time since they fell for a record 10 consecutive weeks in January 2018, according to Refinitiv data going back to 1982. Total crude stockpiles, however, would still be about 3 per cent over the five-year (2014-2018) average for this time of year.

US and Chinese negotiators also meet this week for their first in-person talks since agreeing to a truce to their trade dispute at a Group of 20 meeting last month.

However, expectations for progress during the two-day Shanghai meeting are low, so officials and businesses hope Washington and Beijing can at least detail commitments for "goodwill" gestures and clear the path for future negotiations.

Mr Trump warned China against waiting out his first term in office to finalise any trade deal, saying if he wins re-election in the November 2020 US presidential contest, the outcome could be no agreement or a worse one.

Supply risks are still a concern as tensions remained high around the Strait of Hormuz, through which about a fifth of the world's oil passes.

BP Plc has not taken any of its own oil tankers through the strait since a July 10 attempt by Iran to seize one of its vessels, its chief financial officer said.

Meanwhile, the United States has formally asked Germany to join France and Britain in a mission to secure the Strait of Hormuz and to combat Iranian aggression, the US Embassy in Berlin said.

REUTERS