News

Published: June 7, 2023
Updated: June 7, 2023

Crude Oil Prices Slide as Economic Worries Diminish Impact of Saudi Arabia's Output Cut

Crude oil prices witnessed a sharp decline, losing over $1 per barrel, as concerns surrounding global economic growth overshadowed Saudi Arabia's commitment to deeper output cuts. Despite the world's leading exporter's announcement of reducing production by 1 million barrels per day (bpd) in July, factors such as weaker demand, increased non-OPEC supply, potential recessions, and slower growth in major economies have cast doubt on the sustainability of a significant price increase. This article examines the key factors influencing the oil market and their potential impact.

Weaker Demand and Strong Non-OPEC Supply:

Amid mounting worries about the global economy, the demand for oil has weakened, exerting downward pressure on prices. Additionally, non-OPEC oil-producing nations have ramped up their supply, further contributing to the market's bearish sentiment. These factors have diminished the impact of Saudi Arabia's output cut and have hindered the possibility of a sustainable price surge.

Uncertain Economic Outlook:

Concerns about potential recessions in major economies, such as the United States and Europe, have added to the downward pressure on oil prices. Weakening economic indicators, including a broad-based miss in U.S. services PMI and an unexpected fall in German industrial orders, have intensified worries about global growth prospects. Market participants are closely watching for the U.S. Federal Reserve's decision on interest rates, as higher rates could potentially dampen energy demand.

Backwardation in Futures Market:

Following Saudi Arabia's output cut announcement, the backwardation in Brent crude oil futures—where the current price is higher than future prices—initially increased. However, the steepening backwardation trend reversed on Tuesday, with the six-month spread reaching a five-week high of $2.20 per barrel and subsequently falling to around $1.96 per barrel. This reflects the market's focus on demand risks and the broader economic concerns.

Inflationary Pressure and Interest Rate Hikes:

The possibility of entrenched inflationary pressure and expectations of interest rate hikes have further weighed on oil demand predictions. If economic data suggests a sustained rise in inflation and investors anticipate further rate hikes, it could lead to downward revisions in demand forecasts, offsetting the ostensibly bullish impact of the recent OPEC + output decision.

Short-Term Energy Outlook and China's Trade Data:

The U.S. Energy Information Administration (EIA) is set to release its short-term energy outlook, providing additional insights into the market. Moreover, China's trade data for May, scheduled to be published on Wednesday, will offer fresh indications of demand trends from the world's second-largest oil consumer.

Despite Saudi Arabia's commitment to deeper output cuts, crude oil prices have declined due to concerns surrounding global economic growth. Factors such as weaker demand, increased non-OPEC supply, potential recessions, and slower growth in major economies have dampened the anticipated impact on prices. Market participants are closely monitoring economic indicators and interest rate decisions to assess the future trajectory of oil demand. The forthcoming short-term energy outlook and China's trade data will provide valuable insights into the market's dynamics.