Crude oil prices drop nearly 8% in just 5 sessions to hit a 4-month low on worries over higher supply

Crude oil prices, which had been buoyed by OPEC+'s production cuts, lost ground after the cartel announced a gradual plan to ease some of its restrictions. This worried traders about supply ticking up, leading to a sharp drop in crude oil prices in the last few sessions. 

Brent crude futures fell sharply from $83.94 per barrel to a four-month low of $77.6 in today's session, marking a 7.7% drop. Similarly, WTI tumbled by 8% over the last five sessions. Despite this recent decline, crude prices remain higher for the year due to ongoing geopolitical tensions from the Middle East to Ukraine.

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On Sunday, OPEC+ announced an agreement to extend most of their supply cuts through the third quarter, with a plan to gradually phase them out over the next 12 months, earlier than some OPEC watchers had assumed.

The accord prolongs roughly 2 million barrels per day of cuts, which have played a key role in supporting crude prices above $80 per barrel this year. By December, an additional 500,000 barrels per day is expected to re-enter the market, with a total of 1.8 million barrels per day anticipated to return by June 2025.

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This decision comes even as global oil demand appears dim and robust supply from non-OPEC members persists. The agreement aims to support oil prices while addressing internal pressures from members such as the United Arab Emirates, which has pushed for higher output levels.

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Goldman Sachs Group Inc. deemed the OPEC decision bearish, whereas UBS Group AG and RBC Capital Markets LLC expressed confidence in the alliance's ability to maintain market control. Most analysts had anticipated OPEC would extend the production curbs through the end of the year, as reported by Bloomberg.

Additionally, the U.S. government is set to release inventory and product-supplied data on Wednesday. This data, considered a proxy for demand, will reveal how much gasoline was consumed around Memorial Day weekend, signaling the start of the U.S. driving season.

On the demand side, data indicated that U.S. manufacturing activity slowed for the second consecutive month in May, while construction spending fell unexpectedly for the second month in a row in April, driven by declines in non-residential activity.

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Prices were also impacted by a fragile economic outlook in top consumer China and uncertainties about the pace of interest rate reductions in major industrialized economies.

Investors are now awaiting the ADP employment report on Wednesday and the non-farm payrolls data on Friday to assess the health of the U.S. economy and determine whether these figures might influence the Federal Reserve's decision on rate cuts in September.

Currently, traders are pricing in about a 60% chance of a Fed rate cut in September, according to the CME FedWatch tool.

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