Brent reverses earlier gains as worries about global demand intensify

The front-month ICE Brent contract has plunged $3.10/bbl lower on the day, to $74.77/bbl at 09.00 GMT.

PHOTO: Oil barrels. Getty Images

Upward pressure:

Brent has drawn some support from Saudi Arabia announcement at Sunday's OPEC+ meeting to slash its oil output target by 1 million b/d 9 million b/d from July. This could be the country's biggest output cut in several years. The UAE was allowed by OPEC+ to increased its output by 200,000 b/d, which means 800,000 b/d will added to the 1.16 million b/d cuts committed to by OPEC+ in April.

Russia’s Deputy Prime Minister Alexander Novak announced Russia will continue to hold 500,000 b/d of its production back from the market. OPEC+ as a whole agreed to cut output by an additional 1.4 million b/d from January 2024.

“The size of (the Saudi) reduction is credible and should at minimum limit the downside pressure on prices for the rest of the year,” Reuters quoted JP Morgan’s head of global commodities strategy Natasha Kaneva saying.

Global oil demand is expected to grow by 1.9 million b/d this year and reach record levels, says ING's head of commodities strategy Warren Patterson. “This growth is predominantly driven by non-OECD countries and specifically China,” he adds.

“The US economy is about to show a very robust summer travel season that should mean jet fuel demand is going to be very strong,” notes OANDA analyst Ed Moya.

Downward pressure:

Saudi Arabia - and to some extent the wider OPEC+ group - has sought to prop up crude prices by committing to near-term and longer-term output cuts. But the price rally after Sunday's OPEC+ meeting was short-lived and Brent has slumped by over $3/bbl in the past day. The market seems to have shrugged off the output cut and refocused its attention on weak economic prospects for the US and the West.

"The market remains focused on the risk to demand with recession concerns mounted on a broad-based miss in US services PMI giving room for a Fed pause on rates," Saxo Bank says in a note.

China's oil demand recovery has also been more tentative than initially expected. Weak figures on manufacturing activity for May will be followed by trade data due tomorrow. Being one of the top oil consumers in the world, demand indications from China can have market-moving impacts.

“Oil might remain stuck in a trading range until we see evidence that China’s recovery is improving,” OANDA’s Ed Moya says.

By Aparupa Mazumder 

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