Analisis: Plentiful Supply to Limit Fed Cut’s Effect on Oil

Plentiful Supply to Limit Fed Cut’s Effect on Oil

VIENNA (DTN) – The Federal Reserve’s inaugural 2025 rate cut of 25 basis points — and more reductions planned to support a struggling US labor market – might not do much for the economy nor oil market.

While monetary loosening is typically a boon to demand, the Fed’s easing could unleash a surfeit of new long-dated bonds demanding higher yields that create more inflation in the long run, resulting in a self-defeating outcome for rate cuts.  

The dollar’s impact on oil prices is a separate topic, but the bond yield element provides a critical counter-narrative as higher long-term cost of capital puts more strain on energy companies.

The dollar itself has barely moved the way currency traders had expected after the rate cut. The Dollar Index – a basket that measures the U.S. currency against a basket of six others – traded at 97.42 on Tuesday (9/23) – up decisively from 96.63 level it was at a day prior to the September 17 Fed decision.

Further diluting the impact of the Fed move is the measured pace of cuts strategized by its chairman Jerome Powell – a wise decision in the face of unknown inflation threats but unhelpful to an economy reeling from stunted growth and heavy tariffs on U.S. trading partners.

Even under the best-case scenario, a boost to economic activity will not translate into an equivalent increase in oil demand, given rises in engine efficiency gains, continuing fleet electrification and the growing market share of biofuels.

In fact, while Americans are traveling more than ever, transportation fuel demand has still not caught up to pre-pandemic levels.

In July, vehicle miles traveled set a record just shy of 296 billion. Seasonally adjusted, they were up 1.6% year-on-year and up 0.5% from June.

Gasoline demand, in contrast, continued to lag pre-pandemic averages. In June, the latest month for which the U.S. Energy Information Administration (EIA) has complete data, finished motor gasoline supplied averaged 17.21 million bpd, 3.9% lower than in the same month in 2019.

A similar scenario played out in air transportation, where, despite a record number of travelers, jet fuel demand was reeling from efficiency gains, staying below pre-pandemic levels. Jet fuel consumption in 2024 was down 3% from 2019 levels, even after the second quarter of last year had drawn level with the same period of 2019.

Increased industrial and freight activity is typically supportive of diesel demand, but biofuels and efficiency gains have dented demand for petroleum distillate fuel oil.

Even when including renewable fuels and biodiesel, which have tripled their market share since the pandemic, total distillate fuel oil consumption was still about 1% behind 2019 levels, according to EIA.

In conclusion, the Fed’s opening rate cut of 25 basis points for 2025 and plans for measured reductions going forth may do little to weaken the dollar while allowing inflation to remain high enough to dampen energy sector growth and consumer demand for oil.