Oil: Saudi and Russia cut production, but the market is skeptical of rising prices
Something strange is happening in the oil market. Saudi Arabia will extend its voluntary production cuts for another month and possibly beyond, and Russia has said it will cut exports by half a million barrels a day. More than one million barrels per day less production, but, despite everything, oil prices are not growing as expected.
Traders are selling their oil positions rather than adding to them in anticipation of the supply crunch. Instead they seek to ease, fearing that the drop in demand from the looming economic crisis will be greater than the currently implemented production cut.
The Wall Street Journal reported this week that the Brent futures market has entered contango, meaning that spot prices of the benchmark crude have fallen below the futures price. This suggests that traders do not expect a supply squeeze any time soon.
The latest manufacturing data, released in recent days, revealed that factory activity has collapsed across regions, particularly across much of Asia and the Eurozone, as well as the UK. Activity picked up in China, but the increase appears to have been too small to impress oil traders.
Add to that the fact that central banks continue to focus on raising rates as an inflation cure, the economic growth outlook for some of the world's largest oil markets does not look good, and trader behavior bears this out.
Reuters' John Kemp, in his latest column on oil trading, said institutional trader sentiment hadn't been this bad since 2020, when government responses to the pandemic sent oil prices tumbling as lockouts destroyed demand.
Institutional traders' net position on the three most traded crude oil contracts (Brent, NYSE WTI and ICE WTI) had dropped to 205 million barrels at the end of June. This is the lowest value since records began in 2013, Kemp noted.
Related: Iran's Growing Oil Production: A New Threat to OPEC's Market Hold
It seems that, despite the mixed forecasts for oil demand in the second half of the year, operators have chosen the path of pessimism. OPEC and even the International Energy Agency, as well as most investment banks, expect a recovery in demand. However, the World Bank warned last month that global growth will slow during the same second half, driven by inflation and central bank responses to it.
Interestingly, the World Bank's forecasts are not all that pessimistic. Indeed, in its latest update it revised the outlook for the global economy upwards. However, pessimism in demand appears to have become a staple of oil markets of late, keeping prices lower despite pledges to cut production.
However, things could change over the course of the year. Despite the eurozone's recession, China's slower-than-expected recovery and US growth doubts, the world continues to consume oil. Sooner or later, production cuts will start to affect prices. Unless the demand outlook gets even bleaker than it now appears, based on the behavior of oil traders.
So if demand proves resilient in the face of the challenges of the economic slowdown, prices could quickly and abruptly reverse course. Reuters' Kemp wrote that "extreme pessimism about crude oil prices and biased positions are creating the potential for an explosive rally ahead": in fact, no position is more dangerous than one in which prices fall on an expected cut. of demand which is not realized, but which in the meantime has already led to a cut in supply which is difficult to reverse.
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The article Oil: Saudi and Russia cut production, but the market is skeptical about the increase in prices comes from Scenari Economics .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/petrolio-arabia-e-russia-tagliano-la-produzione-ma-il-mercato-e-scettico-sullaumento-dei-prezzi/ on Tue, 04 Jul 2023 15:57:05 +0000.