Oil prices witnessed a 2% increase on Tuesday as the market assessed supply reductions by leading exporters Saudi Arabia and Russia in August, against a backdrop of a weakened global economic outlook.
In an effort to stabilize the market, Saudi Arabia announced an extension of its voluntary production cut of 1 million barrels per day (bpd) into August. Additionally, Russia and Algeria volunteered to reduce their August output and export levels by 500,000 bpd and 20,000 bpd, respectively.
Should these measures be fully implemented, it would result in a combined reduction of 5.36 million bpd from August 2022 onwards. PVM analyst Tamas Varga noted that the actual reduction might be even higher due to several countries within the OPEC+ producer group being unable to meet their output quotas. Currently, the total cuts amount to over 5 million bpd, equivalent to 5% of global oil output.
By 1520 GMT on Tuesday, Brent crude futures rose by $1.49 to reach $76.14 per barrel. U.S. West Texas Intermediate crude also climbed $1.41 to settle at $71.20.
Andrew Lipow, president of Lipow Oil Associates based in Houston, highlighted that Saudi Arabia’s proactive steps to stabilize crude oil prices and achieve gains of $80 per barrel to support domestic budgets were evident. However, Lipow mentioned that the market would await confirmation of Russia’s announced cuts, expressing concerns about the impact of high interest rates on global demand.
The previous session had seen oil benchmarks close approximately 1% lower due to a gloomy macroeconomic outlook erasing early gains. Trading was inactive in U.S. markets on Tuesday due to the Independence Day holiday.
Despite Monday’s announcements, OANDA analyst Craig Erlam observed minimal changes in the oil market dynamics. Erlam stated, “Only a significant break above $77 will suggest something has changed; otherwise, range-bound trade is likely to persist.”
Business surveys have revealed a decline in global factory activity attributed to sluggish demand in China and Europe, while U.S. manufacturing also experienced a further drop in June, reaching levels last seen during the initial wave of the COVID-19 pandemic.
This prevailing uncertainty is expected to overshadow the efforts of the OPEC+ alliance to tighten supply, according to some analysts.
Even prior to the latest production cuts, data from the International Energy Agency (IEA) indicated an estimated supply deficit of around 2 million bpd in the third and fourth quarters, as highlighted by analysts at Commerzbank (ETR:CBKG).
Oil prices did not experience a significant surge upon the news due to concerns regarding China’s slow economic recovery following the easing of pandemic restrictions. Moreover, the anticipated rise in interest rates in the U.S. and Europe, aimed at addressing persistent high inflation, further contributed to demand worries, as stated by the analysts.
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