Oil prices down $2, Brent and NYMEX at 1-month lows; US Fed decision in focus

Oil prices fell $2 on June 12 with Brent and NYMEX benchmarks dropping to one-month lows ahead of the US Federal Reserve meeting as investors tried to gauge the central bank's appetite for further rate hikes. Concerns on China's fuel demand growth and rising Russian crude supply also weighed on the market. Chinese economic data raised concerns about demand growth in the world's largest crude importer, offsetting a surge in oil prices from Saudi Arabia pledging to cut production by 1 million barrels per day (bpd) in July.

Brent crude futures fell $1.91, or 2.5 per cent, to $72.88 a barrel and US West Texas Intermediate (WTI) crude was at $68.15, down $2.02 or 2.8 per cent. Both benchmarks posted their second straight weekly declines last week due to the same reasons above. Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a June 16 expiry, was last trading lower by 2.61 per cent at ₹5,672 per bbl, having swung between ₹5,593 and ₹5,750 per bbl during the session so far, compared to their previous close of ₹5,824 per bbl.

Also Read: OPEC is tackling market ‘uncertainties’, says Saudi's oil minister after output cuts

US Fed decision, Saudi output cut: Key factors driving oil market 

US Federal Reserve meeting:

The Fed's rate hikes have strengthened the greenback, making dollar-denominated commodities more expensive for holders of other currencies and weighing on prices. Most market participants expect the US central bank to leave interest rates unchanged when it concludes its two-day monetary policy meeting on June 14. 

In the previous meeting held in May, Federal Reserve Chairman Jerome Powell-led Federal Open Market Committee (FOMC) announced a hike of 25 basis points in interest rates, but signaled that it may pause further increases. The unanimous decision of the FOMC took the fed funds rate to a target range of 5 per cent to 5.25 per cent — the highest since August 2007.

Russian oil exports to Asia:

Russian oil exports to China and India have grown despite the implementation of the European Union's embargo and the Group of Seven's price cap mechanism that started in early December. Moreover, Pakistan's Prime Minister Shehbaz Sharif announced that the first cargo of discounted Russian crude oil arranged under a new deal struck between Islamabad and Moscow had arrived in Karachi.

"Glad to announce that the first Russian discounted crude oil cargo has arrived in Karachi and will begin oil discharge tomorrow," Sharif tweeted. "This is the first ever Russian oil cargo to Pakistan and the beginning of a new relationship between Pakistan and Russian Federation," he added.

Saudi Arabia's oil supply:

Saudi Arabia announced a unilateral cut of one million barrels a day for the month of July at the meeting held in Vienna last week by the Organization of the Petroleum Exporting Countries and its allies or OPEC+. Other oil producers agreed to extend their own existing cuts into 2024, without offering additional action. Saudi Arabia's oil minister Prince Abdulaziz bin Salman said that OPEC+ is trying to combat “uncertainties and sentiment" in the oil market.

In addition, Saudi Aramco has told at least five customers in North Asia they will receive full nominated volumes of crude oil in July, according to news agency Reuters. The Saudi Arabian public petroleum and natural gas company unexpectedly raised its official selling prices for all crude grades to Asia for July-loading cargoes, which would hurt refining profits and could spur refiners to buy more feedstock from the spot market.

What lies ahead?

Goldman Sachs cut its oil price forecasts on higher-than-expected supplies from Russia and Iran and raised 2024 supply forecasts for the two producers and Venezuela by a total 800,000 bpd.

The bank's December crude price forecast now stands at $86 a barrel for Brent, down from $95, and at $81 a barrel for WTI, down from $89. "The bearish allocators will maintain the upper hand for now, as oil prices struggle to rally until the Fed eases money supply, said Francisco Blanch, Bank of America Global Research. The bank still expects Brent crude to average about $80 a barrel in 2023.