Oil Jumps as Easing US Manufacturing Supports Rate Cut Hopes

On Tuesday, oil prices spiked following an unexpected decline in the US manufacturing sector, which may prompt the Federal Reserve to cut rates.

The US West Texas Intermediate (WTI) crude futures for June delivery advanced 0.62% to $83.36 per barrel on April 23. Furthermore, market analysts predict a 0.17% gain to $83.50 a barrel for the American benchmark in the coming trading day.

Similarly, Brent oil June futures soared 1.67% to $88.45 a barrel, reversing the 0.33% drop the day before. Moreover, industry watchers anticipate a 0.90% increase to $89.25 per barrel in the coming market session.

The S&P Global Manufacturing Purchasing Managers Index dropped to 49.90 points in the preliminary reading for April. It followed the 51.90 points posted in March, defied the projected increase to 52.00, and ended three months of expansion.

According to economists, the sudden 2.00-point drop will likely accelerate the first rate cut of the year. Lowering interest rates will stimulate economic activity, drive factory sector growth, and boost crude oil demand.

Borrowing costs have remained unchanged since the Federal Reserve set the benchmark interest rate at 5.50% in July last year. Policymakers expressed reluctance to ease monetary policy, with inflation accelerating for the fourth consecutive month to 3.50% in March.

US Manufacturing Shrinkage to Deepen Oil Draw

Deterioration in the US manufacturing sector typically causes crude oil demand to tumble due to lower industrial activity. However, a Fed rate cut will offset the decline in demand while boosting consumption in other sectors, especially transportation.

The American Petroleum Institute reported a 3.23-million-barrel shortfall in petroleum inventories in the week ending April 19. It nearly wiped out the accumulation of 4.08 million barrels a week earlier and contrasted with the expected build of 1.80 million.

If the Federal Reserve slashes the base rate in its next meeting on May 01, the market may see record crude stock draws. Nevertheless, WTI oil traders remain cautious before Friday’s personal consumption expenditures inflation data release.