Oil prices experienced a substantial decline on Tuesday, dropping more than $1 per barrel. This retreat followed a strong rally in the previous session, as concerns regarding global economic growth overshadowed Saudi Arabia’s commitment to deepening output cuts.
At 1327 GMT, Brent crude futures recorded a decline of $1.30, equivalent to 1.69%, settling at $75.41 per barrel. Simultaneously, US West Texas Intermediate crude witnessed a fall of $1.39, or 1.93%, reaching $70.76.
The positive gains observed on Monday, where Brent gained up to $2.60 per barrel and WTI increased by as much as $3.30, were largely attributed to Saudi Arabia’s announcement. The world’s leading exporter declared that its daily output would decrease by 1 million barrels to 9 million barrels in July.
However, despite this development, analysts from Citi cautioned that weaker demand, increased non-OPEC supply, slower economic growth in China, and potential recessions in the US and Europe would hinder the effectiveness of the Saudi output reduction in achieving a sustained price increase to the high $80s and low $90s.
The backwardation in Brent crude oil futures, signifying higher current values compared to later months, witnessed a deepening trend following the weekend announcement. On Monday, the six-month spread reached a five-week high of $2.20 per barrel, but it dipped to approximately $2.06 per barrel on Tuesday.
Ole Hansen, the head of commodity strategy at Saxo Bank, expressed that the market’s focus remains on the demand risks associated with recession concerns.
This sentiment emerged as US services PMI data fell short of expectations, potentially influencing the US Federal Reserve’s decision on interest rate adjustments in June. The anticipation of higher interest rates could limit energy demand.
Adding to the prevailing sentiment, unexpected data revealed a decline in German industrial orders in April, further dampening the mood in the oil market. Tamas Varga, a broker at PVM, highlighted the possibility of downward revisions in demand predictions if upcoming economic data indicates persistent inflationary pressure and prompts investors to bet on further interest rate hikes.
Such developments would effectively neutralize the ostensibly positive impact of the latest OPEC+ output decision.
Later in the day, the US Energy Information Administration (EIA) is set to release its short-term energy outlook, followed by China’s May trade data on Wednesday. These releases will provide fresh indications of demand for oil, considering China’s position as the world’s second-largest oil consumer.
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