Oil Prices Snap Uptrend As US PCE Data Raises Fed Rate Cut Hopes

Summary:
• Oil prices had been on the rise for the last two days, but the PCE figures met market forecasts, shifting attention to demand-side declines.

Oil prices snapped a two-day winning streak on Friday after US PCE data neutralized the earlier gains brought by Middle Eastern geopolitical pressure. Benchmark Brent was up by 0.2 percent to trade at $85.55 per barrel, while WTI was at $81.33, having declined by 0.5 percent.  The commodity has been on an uptrend since June 5, and has gained 6.4 percent this month. WTI touched $82.72 in the intraday session, its highest mark since May 1.

Traders have raised their bets on a September rate cut by the Federal Reserve, resulting in improved outlook for economic productivity and a higher oil demand. US Personal Consumption Expenditure (PCE) price Index declined in May to 2.6 percent on an annualized basis from April’s 2.8 percent, bringing inflation rate closer to the Fed’s target.

However, projections of a spike in summer-driven demand have failed to materialize so far, with the US crude oil inventories having risen for the fourth successive week last week.  On Wednesday, the Energy Information Administration (EIA) reported that US stockpiles rose by 3.59 million barrels in the week ending June 15, exceeding the forecast decline of minus 2.6 million barrels.

Despite the sustained rise in US inventories, oil had stayed on the uptrend courtesy of geopolitical tension in the Middle East in recent days. Israel and Lebanon’s militant group Hezbollah have raised hostilities this week, with cross-border attacks threatening to blow out into a full-scale war.

Iran is one of the leading oil producers and could be drawn into the conflict as a result of its strong ties to Hezbollah. Analysts have also pointed out that a full-blown war could have a bigger impact than the Israel-Hamas was that has been ongoing since October 2023.

Technical analysis

The momentum on Brent crude oil price signals that the sellers are currently in control, and the downward momentum will likely continue if the resistance stays at 84.50. The downward momentum will likely see the first support established at 84.18. However, extended control by the sellers will break the support and could strengthen the downward momentum to move the price lower to test 83.86. On the other hand, a break above 84.50 will favour control by the buyers. The first resistance will likely be encountered at 84.97, but continued control by the buyers will break the resistance, invalidate the downside narrative and potentially test 85.35.