Oil prices surge 2% as market weighs supply cuts against economic outlook

Tuesday saw a 2% increase in oil prices as traders weighed August production curbs by major producers Saudi Arabia and Russia against a gloomy forecast for the world economy.

On Monday, Saudi Arabia announced that it would continue to reduce its voluntary output by 1 million barrels per day (bpd) through August. In contrast, Russia and Algeria offered to reduce their respective August output and export levels by 500,000 bpd and 20,000 bpd.

If completely implemented, that would result in a joint reduction of 5.36 million bpd starting in August 2022; but, given that numerous OPEC+ production nations are unable to meet their output requirements, the decline may be considerably greater.

The overall reductions now exceed 5 million bpd, or 5% of the world’s oil production. Brent crude futures ended the day on Tuesday at $76.25 a barrel, up $1.60. West Texas Intermediate crude for the United States was up $1.44 to $71.23.

In order to maintain their domestic finances, the Saudis are undoubtedly acting pro-actively and preventively to stabilise the price of crude oil and see gains to reach $80 a barrel.

The market will wait to see if Russia will actually implement the cutbacks it announced, and there are still worries that high interest rates may hurt demand globally. The previous session saw a about 1% decline in oil benchmarks as a bleak macroeconomic outlook helped to reverse early gains. Due to the Independence Day holiday, U.S. markets were closed on Tuesday.

Despite the announcements made on Monday, little has altered in the oil market dynamics. Only a meaningful break over $77 will indicate a change; else, range-bound trading may well continue. Because of weak demand in China and Europe, business surveys have showed a decline in factory activity worldwide. In June, U.S. manufacturing likewise declined to levels last seen during the first wave of the COVID-19 epidemic.

The efforts of OPEC+ to tighten supplies are likely to be overshadowed by this larger uncertainty. Even before the most recent cut pronouncements, data from the International Energy Agency (IEA) projected that the third and fourth quarters would see an estimated 2 million bpd supply imbalance on the oil market.

Because of demand concerns over China’s sluggish economic recovery following the easing of pandemic restrictions, oil prices did not dramatically increase in response to the news. To combat the ongoing high inflation, interest rates are anticipated to increase further in the U.S. and Europe.