the Saudis cornered by the bears – Corriere.it

On June 4, the major oil producers meeting in OPEC+ reached an agreement to extend the production cuts until the end of 2023 and throughout 2024, setting the new oil production target for the 2024. While Saudi Arabia will extend its voluntary cut of 500,000 barrels per day. As taught by one of the fundamental rules of the market, supply is reduced (in this case with production cuts) to push oil prices upwards. Instead, after the peaks of 120 dollars a barrel, immediately after the start of the war in Ukraine, in February 2022, today crude oil prices are falling again.

By mid-morning, Brent for August delivery lost 0.54% to $75.87 a barrelJuly U.S. oil WTI futures also point to a fall to $71.37 a barrel (-0.54%), after closing Tuesday down 41 cents (-0.57%). at $71.74 a barrel. In short, the boost to prices that a cut in OPEC production would have guaranteed in normal times is missing.

What’s going on? What also seems to subvert the basic principles of supply and demand? The fact that these have not been normal times for a long time. And what appears to some to be a chess game between the Saudis and the oil-consuming countries actually reflects the extraordinary uncertainty that dominates the markets, due to high inflation and the rise in interest rates by central banks to fight it, but also due to the geopolitical tensions triggered by the war in Ukraine and by the growing friction between the United States and China.

Let’s go in order. By underestimating the return of inflation, defined as a transitory phenomenon for many months, the central banks were forced into much more aggressive monetary tightening.a, bringing interest rates from zero or negative to 3.75% in Europe (but President Christine Lagarda repeats that the hikes are not over yet) and over 5% in the United States, to levels not seen for over 10 years. The increase in the cost of money slows down investments by companies and penalizes consumption and in this way the aim is to slow down the economy, consequently cooling down prices. But if excessive braking, central bank intervention are likely to cause a recession. And it is precisely these fears that weigh on oil prices. If there is no demand, less oil will be bought, thus nullifying the OPEC+ production cuts.

According to the latest OECD World Economic Outlookthe recovery is weak and the world will grow by 2.7% this year, after the +3.3% recorded in 2022: the euro area will stop at a modest +0.9% (Italy will do better with a +1.2%), in the United States the GDP will increase by 1.6%, in Japan by 1.3% and in China by 5.4%, betting on a new stimulus intervention by the Central Bank.

The winds of recession are also blowing over China, as indicated by the latest data on China’s trade balance: exports fell by 7.5% in May compared to +8.5% in April, more than expected, while the decline in imports continues, down by 4.5% in May, albeit at a slower pace of the previous month (-7.9%). The trade balance surplus also decreased, reduced to 65.81 billion against an expectation of 92 billion. The Chinese slowdown not only impacts on the global economy, pushing growth forecasts down, but weighs on the demand for oil, of which Beijing is a major consumer.

But something else is happening that could affect prices, messing the game. Data on Russian crude oil exports by sea in recent weeks would not have complied with any cuts, on the contrary they would have increased. In the four weeks to June 4, Russia’s average seaborne crude exports rose to 3.73 million barrels per day, up from a revised 3.68 million barrels in the four weeks to May 28, data from tracking of tankers monitored by Bloomberg. For Moscow, under international sanctions after the invasion of Ukraine, the export of vital energy to finance the war and to run its economy, for this reason it is struggling to respect the commitments signed by OPEC+, which has extended the cut half a million barrels a day through the end of 2023 and then through 2024. If the Saudis are increasingly nervous, Russia has stopped reporting oil production levels, forcing the market and analysts to rely on data from vessel tracking, trade sources and import statistics to China and India on the amount of Russian supply.

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