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Oil Prices Soar on Crude Inventories Fall, US Third Rate Cut

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Oil prices appreciated on Wednesday after US crude inventories fell and the US Federal Reserve cut interest rates as expected, with Brent futures chalking up 20 cents or 0.27 per cent to trade at $73.39 per barrel and the US West Texas Intermediate (WTI) growing by 50 cents or 0.71 per cent to $70.58 a barrel.

Yesterday, the US Energy Information Administration (EIA) reported an inventory decline of 900,000 barrels for the week to December 13 versus an inventory draw of 4.7 million barrels estimated by the American Petroleum Institute (API) for the same week on Tuesday.

A week ago, the EIA estimated a crude oil inventory draw of a much more moderate 1.4 million barrels, while sizable builds in fuel stocks dampened the potential bullish effect of the crude inventory move.

For the week to December 13, the EIA estimated mixed changes in gasoline and middle distillate inventories.

Also, the US Federal Reserve cut interest rates for the third time to the 4.25 per cent and 4.50 per cent range.

The Federal Reserve, which hiked rates aggressively in 2022 and 2023 to combat a surge in inflation, began its easing cycle in September with a half-percentage-point cut in borrowing costs and followed up with a quarter-percentage-point cut last month.

The US central bank also signalled it will slow the pace at which borrowing costs fall further, given a relatively stable unemployment rate and little recent improvement in inflation.

There are projections that they will make just two quarter-percentage-point rate reductions by the end of 2025.

Lower rates decrease borrowing costs, which can boost economic growth and oil demand.

The decision led to the strengthening of the Dollar and limited gains in oil prices, as a stronger greenback makes oil more expensive in other countries, which can reduce demand.

Meanwhile, the latest sanctions announced by the UK and the EU against Russia are believed to limit the downward potential for oil prices but the effect is likely to be short-lived.

Fitch Ratings said on Wednesday that oil demand growth next year is likely to be in line with this year’s and the slower pace of growth compared to 2022 and 2023 would result in oil prices averaging $70 per barrel in 2025

This year, oil prices have averaged about $80 per barrel.

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