Economic headwinds outweigh supply cuts, depress oil prices

Prices initially rose on Monday following the announcement of supply cuts
Economic headwinds outweigh supply cuts, depress oil prices
Oil prices

Despite supply cuts announced for August by top exporters Saudi Arabia and Russia, oil prices settled down by 1 percent due to worries about a slowing global economy and possible U.S. interest-rate hikes. Prices had initially risen on Monday following the announcement of supply cuts, which helped offset early losses driven by economic concerns. However, these worries ultimately proved to be stronger, leading to a drop in oil prices.

Brent crude futures were up 0.6 percent at $75.84 a barrel (currently trading at $75.06), while U.S. West Texas Intermediate crude rose 0.6 percent to $71.03 (currently trading at $70.17).

Saudi Arabia extended its voluntary cut of one million barrels per day (bpd) for another month to include August. However, prices moved lower after business surveys showed that global factory activity slumped in June, and fears of a further economic slowdown denting fuel demand grew as U.S. inflation continued to outpace the central bank’s 2 percent target, stoking fears of more rate hikes.

Read more: Saudi, Russia, extend voluntary oil production cuts in August

According to John Kilduff, partner at Again Capital LLC in New York, “Oil is facing serious economic headwinds, and the market is trying to make sense of what additional crude cuts mean in that context.” Russia will reduce oil exports by 500,000 bpd in August, seeking to tighten global crude supplies and boost prices in concert with Saudi Arabia. The cuts amount to 1.5 percent of global supply and bring the total pledged by OPEC+ oil producers to 5.16 million bpd.

Riyadh and Moscow have been trying to prop up prices, but Brent has dropped from $113 a barrel a year ago, hit by concerns of an economic slowdown and ample supplies. “Investors are turning upbeat as the second half of the year kicks off. They expect tighter oil balance, and buoyant equities also suggest that recession will be avoided, albeit probably narrowly,” said PVM analyst Tamas Varga.

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