By Georgina McCartney
HOUSTON (Reuters) -Oil fell 2% on Thursday after the European Central Bank opted to cut interest rates, fueling hopes the Fed would follow suit. OPEC+ ministers assured investors that the latest oil production deal could change depending on the market.
futures closed $1.46 higher or 1.86% at $79.87 a barrel. U.S. West Texas Intermediate crude futures closed $1.48, or 2%, higher at $75.55.
On Thursday, the European Central Bank went ahead with its first interest rate cut since 2019, citing progress in tackling inflation but warning the fight was far from over.
The Danish central bank then cut interest rates by 25 basis points to 3.35%.
Analysts in the US saw the European rate cuts as a likely precursor to Fed rate cuts.
Lower fuel costs and an easing of post-pandemic supply constraints have helped push inflation down from 10% at the end of 2022 to 2.6% in the 20 countries that use the euro.
Investors are now less confident than they were a few weeks ago that inflation has retreated enough to allow the ECB to trigger a major easing cycle. In the US, economists predict the Federal Reserve will cut interest rates in September, according to the May 31-June 5 Reuters poll.
“Today the ECB rate cuts are helping, and this gives the impression that the Fed will finally follow suit here in the US, which is supportive, but both central banks are cutting back in the face of a slowing economy that does not necessarily support oil. demand,” says John Kilduff, partner at Again Capital.
The number of Americans filing new claims for unemployment benefits rose last week, and unit labor costs rose less in the first quarter than previously thought, the Labor Department said.
While this points to a cooling labor market, it is unlikely to prompt the Fed to cut rates.
Meanwhile, Saad Rahim, chief economist at trading house Trafigura, said OPEC+’s decision to phase out some production cuts, coupled with strong fuel supplies, has pushed oil prices lower.
OPEC+, the Organization of the Petroleum Exporting Countries and Allies, agreed on Sunday to extend most production cuts until 2025, but left room for voluntary cuts from eight members to be phased out.
Saudi Energy Minister Prince Abdulaziz bin Salman said on Thursday that OPEC+ could pause or reverse production increases if it decides the market is not strong enough.
And Russian Deputy Prime Minister Alexander Novak said the group could adjust the deal if necessary, adding that the price drop after the meeting was caused by a misinterpretation of the agreement and “speculative factors.”
“Oil markets have overreacted to the slightly negative outcome of the OPEC+ meeting. Demand indicators have certainly softened somewhat recently, but are not falling off a cliff,” Barclays analyst Amarpreet Singh wrote in a note.
Elsewhere, a merchant ship reported that an explosion took place in the Red Sea on Thursday, about 19 nautical miles west of the Yemeni port city of Mokha, British security firm Ambrey said.
The ship fit the target profile of Yemen’s Houthi militants, Ambrey said in a note. Militants have been attacking ships off the country’s coast for months in solidarity with Palestinians fighting Israel in Gaza.
The ship was en route from Europe to the United Arab Emirates.
“This adds more risk on top of an already nervous market,” said Phil Flynn, an analyst at Price Futures Group. “And if it turns out to be an oil tanker, it will likely raise the stakes,” he added.
