Oil prices rose on Monday, benefiting from a weaker U.S. dollar as recent inflation data led traders to increase bets that the Federal Reserve will cut interest rates by September. However, bigger gains were limited by concerns over top oil importer China, after data showed business activity in the country remained fragile.
Brent oil futures for September delivery increased 0.3 percent to $85.29 per barrel, while West Texas Intermediate crude futures rose 0.4 percent to $81.84 per barrel by 9:10 PM ET (1:10 AM GMT). Both contracts had seen substantial gains through June as geopolitical disruptions in the Middle East and Russia raised concerns over potential supply issues, leading traders to attach a greater risk premium to crude.
Dollar weakness boosts oil
The dollar index fell around 0.2 percent in Asian trade, extending declines from Friday after the PCE price index – the Fed’s preferred inflation gauge – showed a mild easing of inflationary pressures in May. This spurred some optimism that US inflation was cooling and saw traders ramp up bets on a 25 basis point rate cut by the Fed in September, weighing on the dollar.
Focus turns to Fed signals
A weaker dollar benefits oil demand by making the commodity cheaper for international buyers, and also increases risk appetite among traders. Focus this week will be on signals from the Fed, with Chair Jerome Powell set to speak on Tuesday, while the minutes of the June meeting are due on Wednesday. Key nonfarm payrolls data on Friday will also be closely watched, as the labor market is a key consideration for the Fed’s interest rate decisions.
Weak U.S. fuel demand offsets positive factors
However, even with the positive signs on interest rates, inventory data released last week showed that US fuel demand remained weak despite increased travel during the summer season. This was compounded by soft purchasing managers’ index (PMI) data from China, released over the weekend, which raised concerns over the world’s biggest oil importer.
China’s economic slowdown weighs on oil
Manufacturing activity in China shrank for a second consecutive month, while non-manufacturing activity also softened, raising fears that economic growth in the country was dwindling despite recent stimulus measures – a concerning sign for crude demand.
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