Oil retreats over 2% over global growth fears after Saudi output cut led one-day rally; what lies ahead
- Brent crude had gained as much as $2.60 per barrel on Monday and WTI as much as $3.30 after Saudi Arabia, the world's top exporter, announced on June 4 that its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July.
Oil prices declined more than $1 per barrel on June 6, after a strong rally in the previous session as concerns on the global economic growth outweighed Saudi Arabia's decision to deepen oil supply from next month. At its Vienna meeting held on June 4, the Organization of the Petroleum Exporting Countries and its allies led by Russia, or OPEC+ reached a deal on output policy after seven hours of talks and decided to reduce overall production targets from 2024 by a further total of 1.4 million barrels per day (bpd).
Oil benchmarks Brent crude futures were down $1.50, or 1.96 per cent, to $75.21 a barrel while US West Texas Intermediate crude fell $1.47, or 2.04 per cent, to $70.68 a barrel. Brent had gained as much as $2.60 per barrel on Monday and WTI as much as $3.30 after Saudi Arabia, the world's top exporter, announced on June 4 that its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July.
Backwardation in Brent crude oil futures — where the current value is higher than in later months — steepened after the weekend announcement with the six-month spread hitting a five-week high of $2.20 per barrel on June 5.
Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a June 16 expiry, was last trading lower by 2.8 per cent at ₹5,836 per bbl, having swung between ₹5,811 and ₹5,957 per bbl during the session so far, compared to their previous close of ₹6,004 per bbl.
What OPEC+ decided on June 4
Oil producing cartel OPEC+, which pumps around 40 per cent of the world's crude, agreed on a new oil output deal on Sunday. Saudi Arabia, the group's dominant oil producer, will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group faces flagging oil prices.
In addition to extending the existing OPEC+ cuts of 3.66 million bpd, the group agreed to reduce overall production targets from January 2024 by a further 1.4 million bpd to a combined output of 40.46 million bpd.
This comes after the surprise announcement by OPEC+ in April to deepen production cuts helped to raise prices by about $9 a barrel to above $87 per barrel in the days that followed. The price surge in April brought back $100 a barrel back in view, according to analysts. The benchmark crude prices have shed those gains since, with Brent futures on Monday trading at under $78 a barrel.
Where lies ahead for oil prices?
Brokerage firm Citi said in a note on Tuesday that top global crude exporter Saudi Arabia's pledge to deepen output cuts is unlikely to underpin a sustainable price increase into the high $80s-low $90s.
S&P said the policy decision by OPEC+ was within their expectations.
“OPEC+ decided on June 4th to roll over their production quotas with a voluntary cut by Saudi Arabia for July 2023. The move of OPEC+ is within our expectations while the kingdom has made good its intention to shore up the market,'' said Kang Wu, Head of Global Demand and Asia Analytics, S&P Global Commodity Insights.
‘’S&P Global Commodity Insights has long anticipated a significant rise of global oil demand during the Northern Hemisphere’s summer season. This will lead to an oil inventory draw and support higher oil prices over the coming months,'' added Wu.
Other brokerages have signalled a bigger deficit in the second half of the year.
Weaker demand and stronger non-OPEC supply by year end, potential recessions in the US and Europe, and lower growth in China could push prices lower rather than higher this year and in 2024, said analysts at Citi.
Prices are expected to be range-bound, the analysts added, with Brent averaging $81 a barrel through the year. HSBC also maintained its Brent price forecast of $93.5 a barrel for the second half of the year, predicting negative macroeconomic factors would offset some of the support from the cuts.
However, UBS and Barclays were slightly more upbeat. UBS analysts forecast Brent prices at $95 a barrel by end-2023 with a supply deficit seen rising above two million bpd. They added the global market balance is likely to remain in a "meaningful deficit" following the broader OPEC+ agreement to extend voluntary cuts to end-2024, according to news agency Reuters.
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