U.S. stock and energy markets experienced a pullback on Friday, relinquishing substantial gains following the Federal Reserve’s first interest rate cut in four years. The Fed announced a notable half-percentage-point reduction, which Chair Jerome Powell characterized as a “recalibration” rather than a recession-preventing measure. The S&P 500 rose by 2.0%, the Nasdaq Composite increased by 2.9%, while the Dow Jones and Russell 2000 gained 1.48% and 2.2%, respectively. Energy stocks also surged, with the Energy Select Sector SPDR Fund rising by 2.1%, propelled by a continuous oil price rally.
Oil prices are poised for their largest weekly increase since February, driven by the Fed’s interest rate cut and ongoing tensions in the Middle East. Brent crude was trading at $74.76 per barrel, up from $71.80, while West Texas Intermediate crude rose to $72.35 from $68.84. This rally follows a prior period of extreme bearish positioning by money managers, which analysts suggest has skewed oil price risks upward.
Recent weeks saw oil markets grappling with macroeconomic fears and algorithm-driven momentum, leading to a sharp decline in prices. Commodity analysts from Standard Chartered noted that the current bearish sentiment among money managers is the most severe since the Global Financial Crisis of 2008, indicating potential for a short-covering rally.
Ole Hansen, head of commodity strategy at Saxo Bank, stated that low price levels and weak hedge fund sentiment suggested that a recession was needed to justify prices below $70, a risk that this week’s rate cut alleviated. In the energy sector, Tesla Inc. led gains with a 7.3% rise, benefiting from lower interest rates that make car financing more accessible.
Big Oil companies also saw stock increases following the rate cut, with Exxon Mobil, Chevron, Marathon Oil, Shell, and BP all experiencing notable gains. While interest rate cuts generally promote economic activity and energy demand, analysts caution that any benefits may take time to materialize due to prevailing global economic weaknesses.
UBS analyst Giovanni Staunovo emphasized that while U.S. rate cuts have improved market sentiment and weakened the dollar, it will take time for these cuts to translate into increased economic activity and oil demand. Looking ahead, Standard Chartered predicts a tightening oil supply in the coming months, particularly in September, due to seasonal demand and production outages in Libya and the U.S. Gulf. The ongoing complexities in Libya’s oil negotiations are expected to prolong output reductions, with exports currently at half of pre-crisis levels.
Additionally, Russia, Iraq, and Kazakhstan have submitted compensation plans to OPEC for overproduction in early 2024, indicating that OPEC’s output may decrease significantly in the coming quarters if commitments are upheld.
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