On September 18th, the Federal Reserve announced a rate cut of 50 basis points. This was the first cut in the last four years. Obviously, such change has affected nearly all sectors of the economy, including energy.
But it is not the end — there is potential for more rate cuts in the future. So, the acute question now is how it will affect the commodity markets. In this article, let’s delve into this topic and consider the energy markets in more detail.
The Oil Market: Production and Sales Will Increase
Because of high borrowing costs, the oil sector has become less appealing to investors. But the rate cut will change it very soon — the loan interests will also become lower following the key rate. Thanks to cheaper loans, there will be a boost in the overall economic activity and petroleum’s demand. As a consequence, the share price of oil refining companies will grow, and bonds will become cheaper.
Borrowing funds at lower interest in the future is especially beneficial for shale production of oil. The problem is that drilling wells and hydraulic fracturing are still quite expensive, costing 5 to 8 million dollars per well. It is complicated to afford them without additional funds from loans. So, the rate cut will likely make shale production cheaper and boost the whole oil industry.
The Gas Market: Rise in Prices
Just like in the oil sector, the gas market was going through some difficulties. The same situation was observed in the construction of main overpasses: It is very expensive, and activity in this area is moderate, even despite the excess of gas in the Permian basin of the USA.
The interest rate cut has already started to change the situation. Right after the decline, the gas prices started to increase, and they will continue to rise. The rate cut also entails a decline in the loans’ costs. Thanks to the inflow of cheap money, the modernization of existing refineries and the expansion of LNG export terminals can be expected.
Before the rate cut, another problem with transportation was that either infrastructure should be developed to deliver gas to consumers or enterprises should be built in the regions to use the local gas themselves. The two options require long-term and big investments, and the rate reduction will make these funds more affordable.
The Renewables: Lower Costs and Bigger Potential
The rate cut in the renewables sector will drop the cost of projects. This is especially true for solar and wind generation. The construction will also become cheaper, and the capacities will grow. As an example, the volume of solar generation capacity in the US in 2024 as of July 1 amounted to 105.4 gigawatts; similar figures in 2023 and 2022 were 78.4 and 65.1 gigawatts, respectively. The rate cut will help to continue the upward trend, and it will take place not only in solar energy but also in other renewable energy sources.
Nevertheless, many projects may still need governmental support to make profits. At the same time, in five years, the introduction cost has almost halved and will continue to decrease due to new technological solutions. The rate cut will make money cheaper, so the industry will definitely continue to develop thanks to the inflows.
Energy is a Stable Investment Choice
The positive impact of the rate cut will make the whole stock market healthier — there will be growth in the shares of companies in the oil, gas, and renewable energy sectors. Besides the decline in rate, the increased demand for energy resources will drive this change. The overall strengthening of the industry will draw more and more investment.
To actually invest in commodities, it is better to consider market-neutral strategies, for example spread trading or statistical arbitrage. Commodity markets can include seasonal volatility and be affected by weather conditions, but they still offer more stability than stock markets. Infusing some funds into the commodities may give a chance to balance risk and return more effectively.
All in all, the energy market will stay a reliable tool for hedging risks in volatile markets. Besides being comparatively resilient, the energy sector is also fundamentally important for the global economy — there will be no production without it. Thus, the energy market is a trustworthy option for investors and the rate cut will increase its attractiveness even more. Especially for those looking to keep their portfolios more or less stable.