Oil prices encountered a modest downturn on Tuesday, reversing the progress achieved the day before. In spite of Saudi Arabia’s declaration of a substantial reduction in production, apprehensions regarding the worldwide economic situation surpassed concerns about supply. Brent crude futures descended by 51 cents, reaching $76.20 per barrel, whereas the U.S. West Texas Intermediate crude dropped 54 cents to $71.61 per barrel.
Supply Worries Subdued by Economic Concerns:
Although Brent crude and U.S. crude initially surged by $2.60 and $3.30 respectively on Monday following Saudi Arabia’s announcement of a 1 million barrels per day (bpd) output reduction to 9 million bpd in July, the benchmarks retreated to more modest gains by the end of the day. CMC Markets analyst Leon Li suggests that oil prices remain in a bear market, citing concerns about the economic situation, particularly in advanced economies like Germany, where a recession has already been observed.
Impact of U.S. Federal Reserve and China’s Trade Data:
Market participants are closely monitoring the U.S. Federal Reserve’s decision on interest rates in June. The uncertainty surrounding a potential rate hike has the potential to curtail energy demand, although some analysts argue that consumption will remain robust. Additionally, traders are eagerly awaiting China’s May trade data, which will provide insights into the demand trends of the world’s second-largest oil consumer.
Positive Outlook for Demand:
Despite economic concerns, recent economic data suggests that demand will continue to drive the market positively. Claudio Galimberti, research director at Rystad Energy, believes that the release of recent economic data indicates that the U.S. is not in a recession and Europe’s performance is satisfactory. Although China is currently facing a new wave of COVID-19 cases, which has temporarily limited traffic, it is expected to recover swiftly. Furthermore, OANDA senior market analyst Edward Moya anticipates a robust summer travel season in the United States, which will likely drive strong demand for gasoline and jet fuel.
Conclusion:
While concerns about the global economic backdrop overshadowed the positive impact of Saudi Arabia’s output cut, oil prices experienced a slight decline. The uncertainty surrounding the U.S. Federal Reserve’s interest rate decision and China’s trade data continue to influence market sentiment. However, analysts remain optimistic about the demand outlook, with recent economic indicators suggesting that the U.S. is not in a recession and Europe is performing well. Despite temporary setbacks in China due to the COVID-19 situation, a swift recovery is anticipated. Additionally, the upcoming summer travel season in the United States is expected to bolster demand for gasoline and jet fuel.
