Today, the Federal Reserve (FED) will announce its decision on interest rates. Markets are expecting the first rate cut, but it is still unclear whether this will be a smaller cut of 25 basis points (bps) or a more substantial cut of 50 bps. The FedWatch tool, which measures market expectations, indicates a 33% chance of a 25bps reduction and a 67% chance of a cut by 50 bps. A larger cut would suggest that the FED is more concerned about an economic slowdown, while a smaller cut could indicate progress in fighting inflation. Most economists predict that there will be three rate cuts (totalling 75bps) by the end of the year at the next meetings on September 18, November 7, and December 18. However, investors are more worried about the risk of economic growth slowing down and expect cuts of 100bps by the end of the year.
The FED’s decision, scheduled for tonight Polish time, will not only affect financial markets but may also be reflected in petrol prices at Polish petrol stations, impacting oil prices on global exchanges. Recently, fuel in Poland has become cheaper, falling from about PLN 6.50 before the holidays to about PLN 6.05 per litre now.
On September 10, the price of Brent crude hit its lowest level since December 2021 – $68.5 per barrel. This decrease was due to weak economic data from China, causing concerns about oil demand. Since then, prices have been rising again, mainly due to restrictions in oil production in the Gulf of Mexico caused by Hurricane Francine. The US and China, consuming 20% and 13% of global oil production respectively, are key to global markets. The FED’s decision on interest rates will shape the future economic landscape, which can impact oil prices.
The market is focused on how much rates will be cut. Will it be a reduction resulting from progress in inflation reduction, or with the aim of stimulating the economy? Falling energy prices have helped to ease inflation and this trend may continue, as it is expected that weak oil demand will persist until 2025. Oil market investors and traders are waiting for the FED’s decision, trying to assess its impact on the economy and oil demand.
Lower interest rates usually reduce the cost of credit, which can increase investment, stimulate the economy and raise oil demand. The US Energy Information Administration (EIA) estimates that global oil stocks will decrease by 0.9 million barrels per day (b/d) in the third quarter of this year, and by over 1 million b/d by the first quarter of 2025. Consequently, Brent oil prices are expected to rise from $74 at the beginning of September to an average of $82 in December and $83 in the first quarter of 2025. However, other analysts predict persistently weak oil demand until the end of the year and further weakening in 2025, while supply will remain stable.
A more significant rate cut will support the scenario of stronger oil demand in the coming months, which could lead to price increases. The FED’s decision itself may also impact short-term price increases, as investors will forecast higher demand in the future. If the FED decides on a larger cut, it could signal the end of falling fuel prices at Polish stations and a return to a level of around PLN 6.50 per litre – assuming no significant fluctuations in the zloty exchange rate against the dollar.
Pawel Majtkowski, eToro market analyst.
Source: https://ceo.com.pl/czy-fed-podniesie-nam-ceny-paliwa-60845
