Tug of War: Oil Prices Surge as Market Considers Supply Cuts and Economic Prospects

by / ⠀News / July 3, 2023
Tug of War: Oil Prices Surge as Market Considers Supply Cuts and Economic Prospects

In recent days, oil prices have experienced a surge in response to supply cuts by major exporters and concerns about the global economic outlook. The market is closely monitoring the decisions made by top oil-producing countries, such as Saudi Arabia and Russia, as well as the overall state of the global economy. This article will delve into the details of the supply cuts, the impact on oil prices, and the broader economic factors influencing the oil market.

On Monday, the world’s largest oil exporter, Saudi Arabia, said that it will continue its voluntary output cut of 1 million barrels per day (bpd) through the month of August. This move was supported by Russia and Algeria, who volunteered to lower their August output and export levels by 500,000 bpd and 20,000 bpd respectively. When combined, these reductions could potentially result in a total cut of 5.36 million bpd from August 2022 onwards. Furthermore, several countries in the OPEC+ producer group are struggling to meet their output quotas, leading to an even larger reduction in global oil output, which currently stands at over 5 million bpd1.

The news of supply cuts has had a positive impact on oil prices. Brent crude futures, a benchmark for global oil prices, rose by $1.09, or approximately 1.5%, to reach $75.74 per barrel. Similarly, U.S. West Texas Intermediate crude increased by $1.07, or 1.5%, reaching $70.86 per barrel. However, it is worth noting that oil prices experienced a 1% decline in the previous session due to a gloomy macroeconomic outlook. Despite the recent announcements, there seems to be little change in the dynamics of the oil market, and range-bound trade is expected to continue unless there is a significant break above $77 per barrel1.

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The global economic outlook plays a significant role in shaping the oil market. Recent business surveys have indicated a decline in global factory activity, mainly driven by sluggish demand in China and Europe. Additionally, U.S. manufacturing levels have fallen further in June, reaching levels last seen during the initial wave of the COVID-19 pandemic. These broader economic concerns are likely to overshadow the efforts made by OPEC+ to tighten the oil supply1.

Even prior to the supply cut announcements, the International Energy Agency (IEA) data suggested that the oil market was heading towards a supply deficit of approximately 2 million bpd in the third and fourth quarters. This deficit is a result of various factors, including the recovery of global oil demand and the inability of some OPEC+ countries to meet their output quotas. However, the recent sluggish economic recovery in China, coupled with the expectations of rising interest rates in the U.S. and Europe to combat persistently high inflation, have created concerns about future oil demand1.

Oil prices have surged following the supply cuts implemented by major oil-exporting countries. While these cuts are expected to reduce global oil output by over 5 million bpd, concerns about the global economic outlook and demand for oil persist. The market is closely watching for any significant changes in oil dynamics and the resolution of economic uncertainties. As the oil industry continues to navigate these challenges, it is crucial for market participants to stay informed and adapt their strategies accordingly.

First reported on Reuters

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