Oil production cuts by OPEC+ could impact prices this week

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Oil market analysts believe last week’s dramatic sell-off was a reflection of fear rather than something fundamental, putting the focus squarely on upcoming demand estimates from the likes of OPEC for clues about the economy.

Crude oil prices took a beating last week amid concerns about the health of the U.S. banking sector and lingering fears of a recession. When announcing another rate hike of 25 basis points last week, U.S. Fed Chair Jerome Powell suggested that, while the world’s largest economy could fall into a mild recession, more work may be needed to bring inflation down to the Fed’s 2 percent target rate.

Meanwhile, yet another California lender, this time PacWest, came under pressure and may be exploring a potential sale to “maximize shareholder value,” while fears spread to other banks such as Tennessee’s First Horizon and Phoenix-based Western Alliance.

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Recessionary concerns and worries the sky is falling on the U.S. banking sector pulled heavily on crude oil prices last week. Bargain hunters helped pull West Texas Intermediate, the U.S. benchmark for the price of oil, back above $70 per barrel on Friday, but the contract was in the $80 range as recently as April 18.

Analysts said there was no real trigger at the fundamental level that warranted last week’s bloodbath in commodities, though recent data in the U.S. housing sector showed signs of emerging distress.

“I believe the latest collapse has not been supported by fundamental developments which, if correct, may signal a near-term low in the market,” Ole Hanson, the head of commodities strategy at Saxo Bank in Denmark, said.

Hanson added that contagion in the U.S. banking sector could be spreading, while there’s also the potential for what he described as “verbal intervention” from the Organization of the Petroleum Exporting Countries, the de facto central bank of the global oil market, given recent trends in the price of oil.

Last week, OPEC+, the core group of member states and non-member allies such as Russia, enacted a production cut of 1.6 million barrels per day, on top of a pledge from Moscow to hold back on another 500,000 bpd worth of output.

Neither has yet to incentivize a move higher for crude oil prices given lingering demand-side fears, though market watchers say it’s only a matter of time. OPEC, meanwhile, was forced to go on defense after the International Energy Agency accused it of pursuing a certain price rather than market balance.

The market could get tighter as OPEC+ allies eventually implement their production cuts, while demand should improve over the coming summer holiday travel season, according to a research note from Swiss investment bank UBS.

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For now, however, Giovanni Staunovo, a commodities analyst for UBS, said “no one is willing to catch the falling knife” given lingering economic fears. The market needs to see something like a big drain on commercial inventories to move out of the lull, though upcoming forecasts from OPEC economists and those at the U.S. Energy Information Administration could provide some clues.

OPEC economists in their monthly market report for April left their forecast for global economic expansion unchanged at 2.6 percent, lower than the 3.3 percent growth rate last year. On the supply side, EIA cut its forecast for global production given recent action from OPEC+.

Staunovo said he’s not expecting much change in either forecast this week.

EIA’s monthly market report for May is out Tuesday, followed by OPEC’s release on Thursday. Other data that may move the needle for crude oil are inflation figures to April for both the U.S. and Chinese economies, along with weekly reports on the U.S. housing and labor markets.

Edward Moya, a senior market analyst at New York brokerage OANDA, said “sticky” inflation and any further action from OPEC+ warrants attention, but he’s not expecting the poor economic performance to continue for much longer.

“It looks like the majority of the bad news has been priced in for oil,” he said.

 

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