Oil Soars Nearly 4% Ahead Of Fed Rate Decision

The oil markets continue to be volatile and unpredictable, with WTI and Brent crude making significant gains on Tuesday’s morning session just a day after prices took a big plunge on growing Wall Street bearishness. 

At 10:13 a.m. EST, Brent crude for July delivery was trading at $74.50/barrel, good for a 3.7% gain, while WTI crude for July delivery climbed by a similar margin to trade at $69.67 per barrel.

Citing rising supply and waning demand, Goldman Sachs cut its year-end WTI crude outlook to $81/bbl from $89  and its Brent forecast to $86/bbl from $95. Although both levels are still good for nearly 10% upside to current prices, it sent alarming signals across the markets considering it was the second time the Wall Street bank--one of the biggest oil bulls--cut its oil price forecast.

Overall, oil markets remain decidedly bearish even after the latest rally with Brent's six-month backwardation having fallen to its lowest since March at around $1.30. The experts are saying this indicates faltering market confidence in demand outstripping supply over the year. Backwardation is said to occur in commodity futures markets when traders anticipate the future price to be less expensive than the current spot price. The premium future price for a particular contract is usually associated with the cost of carry that includes storage costs and risk of obsolescence. The current situation, therefore, means that oil traders believe that Brent prices will continue falling.

However, a cross-section of Wall Street is growing increasingly bullish, "For market participants to start building up long positions again, they likely need to see larger inventory declines," UBS strategist Giovanni Staunovo has told Reuters, adding he expected this to happen within weeks.

Meanwhile, the markets remain on edge ahead of a crucial Fed decision on interest rates on Wednesday. The Fed's rate hikes have led to a stronger dollar, making dollar-denominated commodities more expensive and weighing on oil and commodity prices. Oil markets have become highly volatile in the current week as traders try to make sense of a mix of both bullish and bearish drivers. 

By Alex Kimani for Oilprice.com

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