In a turbulent start to the week, oil prices witnessed a decline as worries about fuel demand in the world’s leading oil consumers, the United States and China, outweighed optimistic sentiments regarding supply tightening measures implemented by OPEC+ and the resumption of US purchases for reserves.
Brent crude oil, the international benchmark for oil, declined by 26 cents or 0.35%, settling at $73.91 per barrel by 7:41 am. Simultaneously, US West Texas Intermediate crude oil stood at $69.34 per barrel, representing a decline of 20 cents or 0.29%.
Over the past week, both benchmarks recorded their fourth consecutive weekly decline, the longest such streak since September 2022. These declines were primarily fueled by concerns that the United States might plunge into a recession due to the looming “significant risk” of a historic default in the first two weeks of June.
The search for safe havens among investors resulted in a strengthened US dollar, making dollar-denominated commodities more expensive for holders of other currencies.
CMC Markets analyst Tina Teng highlighted that “Oil prices are still under pressure on sluggish demand outlooks as China’s economic reopening progress seems bumpy.” Teng further noted that market jitters were triggered by the recent banking rout in the US.
In the upcoming week, investors will closely scrutinize China’s array of economic data, including industrial output, fixed assets investment, and retail sales, searching for signs of improvement in oil demand.
IG analyst Tony Sycamore expressed his skepticism, stating that “With the uneven re-opening in China and concerns that the US is facing a growth slowdown at a time when the X-date for the debt ceiling is rapidly approaching, topped off by a rally in the US dollar, market sentiment towards crude oil will remain tepid at best.”
Despite the prevailing concerns, the second half of the year might witness a tightening of global crude supplies. The OPEC+ alliance, comprising the Organization of the Petroleum Exporting Countries and its allies, is enforcing additional output cuts, resulting in reduced availability of sour crude. According to Reuters calculations, the group announced in April that some members would decrease output by approximately 1.16 million barrels per day, bringing the total volume of cuts to 3.66 million bpd.
Nevertheless, Iraq’s oil minister, Hayan Abdel-Ghani, does not anticipate further output cuts during OPEC+’s next meeting in June.
On a different note, the United States is expected to recommence the repurchasing of oil for the Strategic Petroleum Reserve (SPR) following a congressionally mandated sale in June, as revealed by Energy Secretary Jennifer Granholm during a recent congressional hearing.
This announcement coincided with a weekly report by energy services firm Baker Hughes Co (BKR.O), which indicated that the number of US oil rigs dropped by two to reach 586 this week, the lowest level since June 2022. Furthermore, the number of gas rigs witnessed a significant decline of 16, totaling 141.
Meanwhile, officials with direct knowledge of the discussions disclosed that leaders of the Group of Seven (G7) nations may announce new measures during their May 19-21 meetings, targeting sanctions evasion involving third countries. These strengthened sanctions aim to impede Russia’s future energy production and curb trade that supports the Russian military. India and China, the top two crude importers globally, have become key purchasers of Russian crude since the European Union imposed an embargo in December.
