Despite last week’s Saudi announcement of a unilateral oil production cut of 1 million barrels per day (bpd) in July, oil prices ended the week with a second consecutive weekly loss as market participants continued to be focused on signals of weaker-than-expected demand instead of tighter supply.
Oil traders and speculators seem to have so far largely ignored not only the Saudi attempt to further tighten the market this summer, but also the warning of Saudi Energy Minister, Prince Abdulaziz bin Salman, from the end of May, when the most powerful oilman in the OPEC+ alliance told traders to “watch out” and stop betting on declining oil prices.
“I keep advising them that they will be ouching — they did ouch in April,” Abdulaziz bin Salman said back then.
After an initial hesitation following these remarks, traders continued to pile bearish bets on oil futures a week before the June 4 meeting of the OPEC+ group.
After the meeting, oil prices failed to keep a one-day rise and slumped last week amid concerns that demand may not be as strong as many analysts had forecast early this year. Uncertainty about oil demand in China and looming recessions in developed economies continue to be the drivers of oil price moves, not the Saudi cut.
Prince Abdulaziz bin Salman defended the unilateral Saudi cut on Sunday, telling a business conference in Riyadh that OPEC+ is fighting with “uncertainties and sentiments” in the market. Related: Iberdrola Sells Mexican Gas-Fired Plants For $6 Billion
“I think the physical market is telling us something and the futures market is telling us something else,” the Saudi energy minister said, as carried by The National.
“To understand Opec+ today, it’s all about being proactive, pre-emptive and precautionary,” he added.
Some traders and analysts have interpreted the proactive Saudi cut as an admission that demand may not be as strong as initially expected. Others believe the production cut – for July only but could be extended, Prince Abdulaziz bin Salman said – will tighten the market so much that prices will rise toward the end of the year to above $80 per barrel, and even $90 and $100.
Brent prices are currently lingering in the low to mid-$70s, and traded at $73 a barrel early on Monday in Asian trade. That’s even lower than where prices were just before the OPEC+ meeting on June 4.
In other words, the market is ignoring the Saudi warning that speculators will ‘ouch’ and is focused on the near-term bearish signals, with little consideration for the potential bullish factors that could emerge later this year.
Concerns about major economies slowing or already in recession and China’s mixed economic data have the oil market worried about demand.
Due to continued high inflation, Germany—Europe’s biggest economy—entered a recession, with GDP contracting by 0.3% in the first quarter of 2023 and by 0.5% in Q4 2022, government data showed at the end of last month.
Updated figures for Germany and Ireland from Eurostat showed last week that the Eurozone also slipped into recession, with GDP contracting by 0.1% in the first quarter of 2023 after a 0.1% contraction in Q4 2022.
China’s exports slumped in May by 7.5% year-on-year, the first drop since February and a sign of weakening global demand for Chinese goods.
China’s crude oil imports, however, jumped in May to the third-highest monthly level on record, as refiners returned from maintenance and built stockpiles. Yet, the most recent economic data out of China continues to be a concern for the market and could result in lower demand for crude and other commodities and slower-than-expected global oil demand growth this year.
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China’s economy and oil demand will be the single most important driver of oil prices this year, even if OPEC+ manages to push prices upwards, Fatih Birol, the Executive Director of the International Energy Agency (IEA) told Bloomberg TV in an interview last week.
“There are many uncertainties, as usual, when it comes to the oil market, and if I have to pick the most important one, it’s China.”
By Tsvetana Paraskova for Oilprice.com
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They know that neither OPEC+’s or Saudi voluntary cuts nor even the hugely bullish China factor stand a chance against a threat of a global banking system that could undermine the very foundations of the global economy.
Credit to them, oil traders read the current uncertainties in the global economy correctly. But this won’t last.
Once fears of a banking or financial crisis disappear altogether from the market, prices will recover all their losses and resume their surge with Brent crude hitting $90-$100 a barrel this year.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert