Oil ditches initial gains on firm US dollar, analysts say buy the dip: Key pressure points for crude this week

Oil prices extended losses and relinquished initial gains, declining by over two per cent on May 31 on a stronger US dollar and weak China's economy data as recovery continues to lose steam, which further raised demand fears from the top oil importer. Asian markets tumbled following the release of the data that affected oil prices to retreat from initial gains witnessed earlier today.

Brent crude futures for August delivery were down $1.75, or 2.37 per cent, to $71.96 a barrel. US West Texas Intermediate crude (WTI) fell $1.90, or 2.74 per cent, to $67.56. Both key benchmarks fell by more than 4 per cent on Tuesday. Brent's July contract - which expires on Wednesday, and the US benchmark were on track for monthly declines of more than nine per cent and 12 per cent, respectively.

On the Multi Commodity Exchange (MCX), crude oil futures due for a June 16 expiry, were last seen trading lower by 1.13 per cent at ₹5,961 per bbl, having swung between ₹5,567 and ₹5,779 per bbl during the session so far, compared to their previous close of ₹5,756 per bbl. 
 

From US dollar, China PMI data to OPEC+ meeting: Key pressure points for crude this week

China manufacturing data: China's manufacturing activity contracted faster than expected in May on weakening demand, with the official manufacturing purchasing managers' index (PMI) down to 48.8 from 49.2 in April. The outcome lagged a forecast of 49.4. The factory activity in China has now slumped to its weakest level since the country ended its zero-Covid policy in December, as its economic recovery continues to lose steam.

A reading above 50 indicates expansion, while anything below that level shows contraction. The official non-manufacturing PMI, which measures sentiment in services and construction sectors, decreased to 54.5 in May from April’s 56.4 - also the weakest level in four months.

US dollar: Further pressure came as the US dollar rose to its highest in over two months, making commodities more expensive for buyers holding other currencies and weighing on oil demand. The US dollar index , which measures the greenback against six major peers, saw support from cooling European inflation and progress on the US debt ceiling standoff, which will advance to the House of Representatives for debate on May 31.

The dollar could add to recent gains if Friday's US May non-farm payrolls number is stronger than expected and raises the probability of the Federal Reserve raising rates again in June. The provisional decision on US debt deal has offered a relief rally in risk assets, including crude oil, according to analysts.

Also Read: What is the US debt ceiling deal and how is it affecting oil prices?

US crude stockpiles: Separately, US crude oil and gasoline stockpiles were seen falling last week, while distillate inventories likely increased, a preliminary poll conducted by news agency Reuters showed on May 30. The poll was conducted ahead of reports from the American Petroleum Institute, an industry group, due on May 31. 

‘’The API forecasted a drop-off of 6.8 million barrels from commercial reserves, however, we will look for the gasoline inventories to gauge the US retail demand trend ahead of the summer driving season. 

Energy producers in the US are seen cutting the drilling activities as can be seen from the drop in rig counts falling below the largest years levels. All these situations look like crude oil supplies are squeezing, and once the demand sees green shoots, oil prices are likely to move significantly higher,'' said Mohammed Imran, Research Analyst at Sharekhan by BNP Paribas.

Also Read: Lauded for ‘self confidence’, who snapped up Russian oil defying the superpower?
 

OPEC+ output: The Organization of Petroleum Exporting Countries and its allies or OPEC+ is set to consider output levels on its June 4 meeting. Mixed signals by the major OPEC+ producers - Saudi Arabia and Russia, on whether or not the group will decide to further cut oil production have sparked recent volatility in oil prices. Despite the latest pullback in prices, HSBC and its analysts do not expect OPEC+ to announce further cuts in the upcoming meeting. 

Saudi's Prince Abdulaziz bin Salman announced that he would inflict more pain on short sellers and told them to watch out just days before a planned OPEC+ meeting to decide on future oil policy. Only a day after the Saudi's warning, Russia’s deputy prime minister Alexander Novak played down the prospect and poured some cold water on expectations of another supply cut, saying he doesn’t expect new steps.

'’OPEC+ group have started cutting 1.6 mbpd of additional oil from the beginning of this month in addition to the official output cut quota of 2mbpd bringing the collective cuts to 3.6mbpd, which is large enough to bring the global market balance into deficit by the end of July,'' said BNP Paribas' Imran.

Where are prices headed?

HSBC said on Wednesday that stronger oil demand from China and the West from the summer onwards will bring about a supply deficit in the second half of the year. "The most likely action is inaction," said PVM oil market analyst Stephen Brennock, regarding the OPEC+ decision.

Amid the declining prices, some analysts are also robust on buying the dip. ‘’We expect WTI oil prices to remain supportive of the supply-side pressure, however, the softer demand trend will continue to see some more consolidation. WTI prices will face resistance of $76-$78, while we advise buying the dip as support remains around $69,'' said BNP Paribas' Imran.