Oil Prices Stall Despite Fed Rate Cut as Demand Fears Dominate

Summary:

Despite the U.S. Federal Reserve’s first interest rate cut of 2025, oil prices showed little movement as market sentiment remained clouded by demand-side concerns in the United States, rising distillate inventories, and signs of economic slowdown...

Fed Cut Fails to Lift Oil as Demand Signals Weaken

Oil prices remained largely flat on Friday, with Brent crude edging down just 1 cent to $67.43 per barrel and WTI slipping 4 cents to $63.53, following a previous session’s loss. While both benchmarks are still on track for a second consecutive weekly gain, the anticipated bullish reaction to the Federal Reserve’s rate cut failed to materialize due to emerging cracks in U.S. fuel demand.

The Fed lowered its benchmark rate by 25 basis points on Wednesday, citing a weakening labor market and housing slump as justification for the policy shift. In typical economic cycles, such monetary easing would be expected to stimulate energy demand by reducing financing costs for consumers and businesses alike. However, oil markets remain cautious.

Distillate Build and Labor Market Weakness Dampen Optimism

A major driver of the subdued oil sentiment was the surprise 4 million barrel jump in U.S. distillate inventories quadrupling market expectations of just 1 million barrels. This unexpected build indicates declining consumption in key sectors such as trucking, heating, and industrial activity.

Additionally, the latest labor data underscores economic fragility. Initial jobless claims suggested a cooling job market, while housing data revealed that single-family home construction fell to its lowest level in nearly two and a half years. These indicators point to broader demand headwinds for oil, especially as diesel and heating oil use track closely with real economic output.

Tony Sycamore, analyst at IG, noted that a stronger U.S. dollar and rising long-term Treasury yields added to crude’s burden, undercutting price support that would typically follow a Fed rate cut. The dollar index climbed 0.43%, weighing on commodity prices by making dollar-denominated oil more expensive for foreign buyers.

Geopolitical Signals Ease Supply Concerns

On the supply side, oil markets found a measure of relief as Russia now the world’s second-largest crude producer after the U.S. announced fiscal mechanisms to insulate its budget from oil price volatility and Western sanctions. The move is seen as reducing the likelihood of unexpected supply disruptions that could have added volatility to global markets.

Meanwhile, former President Trump’s remarks favoring lower oil prices over sanction-driven supply constraints in Russia further reassured traders. ANZ analyst Daniel Hynes noted that such political positioning could help stabilize global supply sentiment in the near term, dampening risk premiums.

While rate cuts are traditionally bullish for oil, this week’s price action shows that fundamentals particularly demand-side indicators are regaining control of market direction. Unless inventory builds and labor softness reverse course, crude prices may continue to drift despite broader macro stimulus. The dual narrative of cautious consumption and steady supply will likely keep oil in a narrow range unless disrupted by geopolitical shocks or stronger-than-expected economic rebounds.

Source: Reuters

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