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Crude oil erases gains of OPEC+ output cut decision

by ChemOrbis Editorial Team -
  • 21/04/2023 (09:03)
Both Brent crude and US West Texas Intermediate (WTI) future contracts headed for their lowest closes since March 31 this week, erasing the gains that followed OPEC+’s surprise decision to cut output by 1.16 million bbl/day. Analysts and traders attributed the two-week low in crude oil futures to “red flags” for economic recovery and oil demand.

Oil turns bearish again after 4 weeks of gains

Crude oil notched their fourth weekly gain last Friday as markets saw OPEC+’s output plans as a bullish sign for the oil market. International Energy Agency’s (IEA) recent oil demand forecasts and expectations of Chinese economic recovery also prompted some markets bulls to double down on their near-term estimates by the end of last week.

Downside risks outweigh support from OPEC+ cut

However, several traders and analysts took a more cautious stance, watching for red flags that could threaten oil demand and forecasts for an extended period of bull market conditions. One concern was that the OPEC+ may be reacting to weak demand that may take some time to recover. Another factor was the potential for rising inflation, which could lead to higher interest rates and slower economic growth.

“Surprise OPEC+ supply cuts announced on 2 April risk aggravating an expected oil supply deficit in 2H23 and boosting oil prices at a time of heightened economic uncertainty, even as industrial activity slows in the world’s largest economies and production growth outside the alliance appears robust.” - IEA Oil Market Report

Wednesday’s close showed that downside risks to demand outweighed support from the OPEC+ and the sharp decline in US crude inventories. This was largely due to stronger US dollar, which reacted to continued concerns about Federal Reserve (Fed) interest rate hikes.

Drawback in US crude inventories fails to prop up oil prices
According to the US Energy Information Administration (EIA), US crude stockpiles fell by 4.6 million barrels last week to a 10-week low, indicating a larger withdrawal than the 1.1-million-barrel drop analysts forecast. Although an estimated decline in US crude stockpiles generally support higher prices, fears that Fed interest rate hikes could hurt energy demand caused a rally in US dollar, ultimately driving oil pricing lower.

A stronger US dollar increases pressure on oil prices as it makes the dollar-priced commodity more expensive for other currency holders.

Fallout of monetary tightening in US may continue

Although heightened mobility in the peak summer season in the US is likely to increase transportation fuels demand, ongoing monetary tightening measures by the Fed remained a key concern for traders and analysts alike as these potential challenges could offset some of the seasonal dynamics.

“Our forecast for global liquid fuels consumption is unchanged from last month’s outlook. However, increasing risks in the US and global banking sectors increases uncertainty about macroeconomic conditions and their potential effects on liquid fuels consumption, which increases the possibility of liquid fuels consumption being lower than our current forecast.” – EIA Short-Term Energy Outlook
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