Oil up ahead of US inflation data, set for third weekly gain

Oil prices experienced an uptick on Friday, positioning themselves for a third consecutive weekly gain. This upward trend is fueled by growing expectations that the U.S. Federal Reserve will soon initiate interest rate cuts, coupled with anticipation surrounding upcoming U.S. inflation data.

Brent crude futures for August settlement, set to expire on Friday, rose by 54 cents (0.63per cent ) to USD 86.93 per barrel. The more actively traded September Brent contract increased by 0.7 per cent to USD 85.87 per barrel.

Both Brent and WTI futures have seen gains of nearly 2 per cent this week, with both benchmarks on track for monthly increases slightly exceeding 6 per cent. The market is eagerly awaiting the release of U.S. personal consumption inflation data, the Federal Reserve’s preferred inflation measure, scheduled for 1230 GMT.

Market strategist Yeap Jun Rong from IG noted that with the rates market anticipating two Fed rate cuts by year-end, the upcoming price data will serve as a litmus test for whether these expectations are overly optimistic.

The growing anticipation of an imminent Fed easing cycle has sparked a risk rally across stock markets. Traders are currently pricing in a 64 per cent probability of an initial Fed cut in September, up from 50 per cent a month ago, according to the CME FedWatch tool.

Easing interest rates could potentially boost oil demand by increasing consumer spending power. Additionally, a recovery in physical refining margins has supported the market, with Singapore complex refining margins averaging  USD 1 higher in June compared to May, at around USD 3.60 per barrel.

However, gains were somewhat tempered by caution regarding fluctuations in the U.S. dollar, which is currently at a two-month high, and political uncertainty in France. These factors introduce an element of volatility into the market outlook.

Overall, the oil market remains buoyant, supported by expectations of monetary easing and improved refining margins, but tempered by currency movements and geopolitical considerations.