West Texas Intermediate (WTI), the benchmark for US crude oil, is currently trading at approximately $70.80 on Friday, experiencing a slight decline as profit-taking occurs. However, potential downside for WTI prices may be limited due to escalating geopolitical tensions in the Middle East and expectations of further interest rate cuts by the Federal Reserve.
Recent military actions have intensified the situation, with Israeli warplanes and artillery targeting Hezbollah positions in southern Lebanon. This escalation follows a series of explosive incidents last week that resulted in numerous casualties and injuries across Lebanon, as reported by CNBC. Helima Croft, head of global commodity strategy at RBC Capital Markets, emphasized that Lebanon poses a significant risk for oil disruptions, particularly due to Iranian involvement in the regional conflict.
On Wednesday, the Federal Reserve announced a 50 basis point reduction in interest rates during its September meeting. Updated projections suggest a gradual easing cycle, with the 2024 median rate revised down to 4.375% from 5.125% in June. Generally, lower interest rates support WTI prices by reducing borrowing costs, potentially stimulating economic activity and increasing oil demand.
In the near term, decreasing US crude stockpiles could also provide support for oil prices. The US Energy Information Administration (EIA) reported a drop of 1.63 million barrels in crude oil inventories for the week ending September 13, surpassing the prior week’s decrease of 0.833 million barrels. Market expectations had predicted a much smaller decline of only 0.1 million barrels.
Conversely, concerns regarding weak oil demand and an economic slowdown in China could limit WTI’s upside potential. Recent data from China’s Statistics Bureau revealed that industrial production growth fell to a five-month low in August, accompanied by a further decline in retail sales.
