Oil Falls Over Weak Economic Data in China
Crude oil prices decline Wednesday as investor risk appetite was affected by worse-than-expected China industrial data, but losses were contained by optimism about a resolution to the US debt ceiling impasse.
Also, investors continue to be concerned about demand, and appear to be betting that OPEC and its allies, known as OPEC+, won’t cut production more when they hold their monthly meeting this Sunday.
Since October, OPEC and OPEC+ have reduced production by 3.5 million barrels a day, a sizable chunk of the roughly 100 million barrels that the world uses in a day.
Nonetheless, Brent oil prices have fallen from $83 before the October cut to their current levels. International benchmark Brent crude traded at $73.56 per barrel, a 0.20% fall from the closing price of $73.71 a barrel in the previous trading session on Friday.
The American benchmark West Texas Intermediate (WTI) traded at the same time at $69.33 per barrel, down 0.19% from the previous session’s close of $69.46 per barrel.
Following news that China’s official Purchasing Managers’ Index (PMI) dropped to 48.8 in May from 49.2 in April, according to the National Bureau of Statistics (NBS) on Wednesday, the price of Brent oil dropped more than 4% in the previous trading session.
This is the lowest level since December when it dropped to 47. A bipartisan agreement is now up for debate in the House of Representatives with expectations of being passed on Wednesday, following the White House and Republican Speaker of the House, Kevin McCarthy, reaching an agreement at the weekend to raise the US debt ceiling.
Investors are now awaiting the production decision of major producers in the OPEC+ group on Sunday. It will be the first ministerial meeting of the group after some OPEC+ countries in April decided to cut output by 1.6 million barrels per day (bpd) on top of their existing cuts of 2 million bpd.
The main problem has been that demand has been falling. China’s rebound from Covid restrictions hasn’t been as strong as some analysts had expected, and economies are sputtering in other parts of the world.
Russia, which is part of OPEC+, has said it is reducing production by 500,000 barrels a day in retaliation for sanctions related to its invasion of Ukraine.
Shipping vessel data tracked by Bloomberg indicate that Russia’s crude production hasn’t fallen off — in fact, it appears to have risen.
That raises the prospect that Saudi Arabia and other major oil players will press Russia to actually reduce production, which itself would be tantamount to a new cut.
RBC Capital Markets analyst Helima Croft doesn’t expect other OPEC members to get into a dispute with Russia over production. The last time that happened, in 2020, a supply glut led to prices dropping fast.
But Croft writes that OPEC has the incentive to cut production more and prop up prices, and she thinks it is more likely than not that they will. The fact that OPEC is meeting in person — as opposed to remotely — is a sign that they are predisposed to make a more active decision, she writes.
It is also clear that the market isn’t betting on that outcome. Eventually, OPEC’s hand may be forced regardless — though it could take even lower prices to force the cartel to get more aggressive.
“The oil market is not pricing in additional OPEC production cuts, but ironically, the lower prices go, the more likely OPEC will be to announce a cut,” writes Raymond James analyst John Freeman.
