Oil prices steady after weak start to 2024; rate cuts, Red Sea in focus

Oil prices steadied in Asian trade on Wednesday after logging steep losses in the prior session as the dollar rebounded on some doubts over early interest rate cuts by the Federal Reserve, while focus remained on the conflict in the Red Sea.

Crude prices marked a dismal start to the new year, sinking over 1% each on Tuesday as the dollar shot up from near five-month lows amid some doubts over just when the Fed planned to begin trimming rates in 2024.

While prices steadied in early trade on Wednesday, the outlook for oil still remained weak, especially in the face of overheated supplies this year.

Weak economic data from top importer China also provided negative cues to crude, although a Reuters report said the country had issued oil import quotas for 2024 that were 60% higher than the prior year.

Brent oil futures expiring March rose 0.2% to $76.07 a barrel, while West Texas Intermediate crude futures rose 0.2% to $70.83 a barrel by 20:03 ET (01:03 GMT).

Dollar rebound weighs as Fed minutes, nonfarm payrolls take focus
A stronger dollar weighs on crude demand by making oil more expensive for international buyers. The greenback was boosted by two key factors- anticipation of the minutes of the Fed’s December meeting, due later on Wednesday, and nonfarm payrolls data, due on Friday.

Analysts warned that the Fed minutes may not strike an as dovish tone as markets were hoping for- a scenario that is likely to batter bets on early rate cuts. While the Fed had signaled during the meeting that it will cut rates in 2024, it had given no clear cues on the timing of the cuts.

Friday’s nonfarm payrolls reading is expected to show further cooling in the labor space. But markets remained on edge over any surprises, especially given that the reading had consistently beaten expectations through most of 2023.

The CME Fedwatch tool showed traders slightly trimming their bets for a 25 basis point rate cut in March 2024.

U.S. purchasing managers index data for December is also due later in the day, and is expected to show business activity remaining languid in the world’s largest fuel consumer. The U.S. economy is expected to see some cooling this year, as the effects of high interest rates are fully baked into growth.

Red Sea tensions provide limited support
An escalation in the Red Sea conflict over the New Years weekend was also a key point of focus for crude markets, after the U.S. said it had stuck back against the Iran-backed, Yemeni Houthi group in the region. Iran also reportedly deployed a warship into the region.

But the escalation only provided a limited boost to crude prices, given that disruptions to shipping activities in the Red Sea have so far had little impact on global oil supplies. Several shipping firms also signaled that they were resuming routes through the region after the launch of a U.S.-led task force aimed at providing security in the region.

Concerns over the Red Sea conflict had provided some support to crude through December, although this boost now appeared to be wearing thin.