But Saudi Arabia crude oil cut overshadowed by worsening global consumption slump, geopolitics

Following a two-day OPEC+ ministerial meeting, Saudi Arabia announced on Sunday, June 4, a voluntary reduction of one million barrels per day (bpd) in oil production for July. The cut could be extended further, according to Saudi oil minister Abdulaziz bin Salman. The move would decrease Saudi oil output to nine million bpd in July, down from around 10 million bpd in May.

This unexpected move caught many off guard, including International Energy Agency (IEA) chief Fatih Birol who predicted a potentially significant increase in oil prices. Indeed, crude oil prices rose following the announcement but quickly fell back due to a worsening global consumption outlook and shifting geopolitical landscape.

The initial price surge following the Saudi announcement was short-lived. Rumours of a potential U.S.-Iran nuclear deal and a possible return of Iranian oil to the market led to a substantial decrease in oil prices, underscoring the current fragility of crude market sentiments. Both Brent and WTI experienced more than a US$3 drop after media reports about the potential nuclear deal.

After both Iran and the U.S. denied an immediate deal, prices recovered some losses, but it wasn’t enough. Other factors contributed to a second consecutive weekly decline in markets, closing about a dollar a barrel lower than the previous week. Increased U.S. fuel stocks and disappointing Chinese consumption data fuelled concerns about demand growth, causing Brent crude futures to fall $1.17 or 1.5 percent, settling at $74.79 a barrel. Meanwhile, U.S. West Texas Intermediate crude fell $1.12 or 1.6 percent, to $70.17 a barrel. This indicates the U.S. oil benchmark has dropped around 14 percent since its peak in mid-April.

Analysts have raised concerns over the stagnant oil consumption in China, the world’s second-largest economy. Chinese inflation data released on Friday showed a stagnation close to zero in May, indicating a slowing economy. Russia’s surprisingly robust crude exports further added to the supply.

Analysts and investors are now focusing on the summer demand in North America. Some analysts predict a potential rise in oil prices if the U.S. Federal Reserve pauses interest rate hikes at its upcoming meeting. The Fed’s decision could also impact Saudi Arabia’s next move. “As we move deeper into the summer driving season in the Northern Hemisphere, demand will be a key factor in determining whether limited inventories must drive prices higher, or soft demand leads to lower prices,” Rob Haworth, senior investment strategist at U.S. Bank Asset Management, told Reuters.

The lack of a significant market spike, despite Saudi Arabia’s output cut announcement, underscores that current market sentiments may be beyond OPEC’s control. However, it also highlights that Saudi Arabia’s understanding of market dynamics is seemingly superior to others within OPEC+. During the June 3 meeting of oil producers, the Saudi oil minister advocated for further output cuts, a view not universally shared.

OPEC+’s future moves in the global energy sector will be watched closely. If the markets continue to remain soft, it could prompt action before the next scheduled meeting on November 26.

By Rashid Husain Syed

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

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