By Barani Krishnan
Investing.com – Talk of a sharp drop in Iranian oil exports and likelihood of the first U.S. interest rate cut in a decade helped crude rally its most in three weeks.
Yet, the gains could fizzle before the end of the week on demand worries.U.S.
settled up $1.18, or 2%, at $58.05 per barrel. Investing.com data showed it was WTI’s biggest one-day gain since July 10.
London-traded , the benchmark for oil outside of the U.S., settled up $1.01, or 1.6%, to $64.72 per barrel.
Iranian oil exports have dropped in July to as low as 100,000 barrels per day due to sanctions and rising tensions with the United States and Britain, Reuters reported, quoting an industry source and tanker data.
The drop in exports from OPEC-mamber Iran could deepen the impact of an OPEC-led supply-cutting pact.
Expectations that the Federal Reserve will cut its key rate by at least 25 basis points at its July 30-31 policy meeting has also powered a solid run across markets this month, boosting assets from stocks to commodities.
The Federal Open Market Committee is meeting Tuesday and Wednesday and is expected to cut its federal funds rate to 2% to 2.25% on Wednesday. The rate is now 2.25% to 2.5%.
While oil itself has seen mixed fortunes from the rate cut expectations, with WTI and Brent heading for their second month of losses in three, both averted some of their worst downside in July on buying support linked to speculation over a possible Fed easing.
“A Fed rate cut will offer substantial wiggle room for other central banks to lower interest rates, and it’s the thought of this concerted policy effort that is providing the springboard for oil prices,” said Stephen Innes, managing partner at Vanguard Markets.
The Bank of Japan and the European Central Bank refrained from adding further stimulus within the last week, but both left the door open for further action.
“In addition, the markets are likely positioning in anticipation of significant policy response from the (People’s Bank of China), which will be like adding jet fuel to risk markets,” Innes said.
“Also, the resumption of trade talks (between the U.S. and China) is being viewed in a positive light, and, while the markets remain in ‘hope for the best but prepare for the worst’ mode, an agreement on practically anything will be considered a positive sign,” he said.
U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer are in Shanghai for meetings with their Chinese counterparts.
But expectations remain low for any major breakthrough In U.S.-China talks. And tweets from President Trump Tuesday suggested a deal may be further away than it had seemed in recent months, The Washington Post said.
And despite the positive sentiment all round, there remains a nagging feeling that whatever gains oil tacks on could dwindle before the end of the week as demand worries continue to tug at the market’s underbelly.
The Iranian crisis itself has been a double-edged sword for the market. While the slump in Tehran’s crude exports due to sanctions has boosted oil prices, Iran’s move earlier in the week to hold cordial nuclear talks with the United Kingdom, Germany, France, Russia and China has been a drag on prices.
If tensions over Iran ease further or if Tehran manages to strike a new nuclear deal with the Trump administration to suspend sanctions on its oil, there are concerns that up to 2 million barrels per day of additional crude could enter the market, negating OPEC production cuts and adding to current oversupply.
Outside of geopolitical considerations, attention will turn later to the American Petroleum Institute’s weekly data of U.S. crude stockpiles, ahead of official government data from the Energy Information Administration on Wednesday.
Consensus is looking for a seventh-straight weekly draw of 1.82 million barrels. Last week, the EIA data showed a plunge of nearly 11 million barrels that did little to boost prices. Analysts suggested the draw was distorted by Hurricane Barry. The storm hit the central Louisiana coast on July 15 and forced oil companies to shut in production on oil platforms operating in the Gulf of Mexico.