Despite an initial uptick, oil prices experienced a decline, unable to shake off lingering doubts about the effectiveness of the recent supply cuts announced by OPEC+. The global benchmark, Brent, approached $78 per barrel following a six-week losing streak, while West Texas Intermediate dropped below $74. This downward trend persisted despite speculation surrounding the US Federal Reserve’s decision to halt interest rate hikes and the potential re-tightening of US sanctions on Venezuelan oil supply.
Ongoing Challenges for the Oil Market
The oil market recorded consecutive monthly declines, influenced by a surge in supplies from non-OPEC countries and a softening outlook for demand growth. The retreat persisted even after OPEC+ implemented additional production cuts in response to a challenging meeting marked by internal disagreements and delays.
Cautious Market Sentiment
Market strategist Charu Chanana from Saxo Capital Markets Pte highlighted that traders remain cautious, citing discord within OPEC and the continuous increase in non-OPEC oil production.
Backwardation and Market Outlook
Brent’s prompt spread, indicating the gap between its two nearest contracts, narrowed to 9 cents a barrel in backwardation, down from 49 cents a month ago. This shift suggests a loosening near-term outlook for the market. Crude oil is expected to maintain volatility and a potentially directionless trajectory until clear data on the group’s voluntary output cuts, effective from the next month, becomes available.
Shift to a Supply-Driven Market
RBC Capital Markets LLC analyst Michael Tran noted a shift toward a supply-driven market, reminiscent of the decade preceding the COVID-19 era rather than the demand-led market observed in the post-pandemic period. Tran warned of potential pitfalls, describing such markets as prone to bull traps.
Geopolitical Tensions in the Middle East
In the Middle East, geopolitical tensions added to market uncertainties as Iranian-backed Houthi rebels claimed responsibility for targeting two Israeli ships in the Red Sea. This event occurred amid a series of attacks on commercial vessels in international waters during the ongoing conflict in Gaza. The US reported the interception of three drones by one of its destroyers.
In summary, oil prices faced downward pressure as doubts persisted about the impact of OPEC+ supply cuts. Geopolitical tensions in the Middle East further contributed to market uncertainties, emphasizing the complex dynamics influencing the oil market.
