Oil prices rose during early Tuesday trading following the announcement by Saudi Arabia that it intends to extend lower levels of production through to August. Meanwhile, reports emerged from Russia, giving an account of Moscow’s plans to cut output by half a million barrels a day.
The news that the top two global exporters of crude are holding back on production supported the price of the barrel, but the gains are minimal. The bigger picture for oil traders remains one of uncertainty over the global economic outlook.
This is also the core thesis behind my own short trade on oil. OPEC obviously wants to keep cutting production to keep the price above $70 bbl, possibly even closer to $75 bbl, but with a slowing economy in China, and indeed globally, this is proving difficult. A possible global recession is the 600 pound gorilla in the room here.
“This uncertainty is denting future demand expectations and generating strong resistance to price rises,” said Ricardo Evangelista, an analyst with CFD broker ActivTrades. “Against this background, the impact of the output reductions has been subdued, with the outlook for oil prices remaining somewhat bearish.”
Oil prices stay muted despite Saudi cuts
Despite news of the cuts, oil prices remain muted today. Crude futures are in the green though still within last week’s range. More broadly, the 65.34 – 72.61 range remains key to watch with bulls needing to see a break of the range highs and bear trend line to encourage fresh upside momentum.
Brent crude is hovering around $75 a barrel, off June lows of $71 but it’s still struggling to regain momentum as traders assess China’s slowdown and the impact of higher interest rates in other major economies on demand. The effects of the recent production cut have largely fizzled away, but an extension looks increasingly likely, given the oil-rich Kingdom wants to keep prices elevated to help pay for ambitious national projects.
OPEC’s international seminar held in Vienna on Wednesday and Thursday this week will be closely watched, particularly for any hints on policy from Saudi Energy Minister Prince Abdulaziz bin Salman, who has been keeping traders on their toes with his often cryptic comments about his country’s oil strategy.
Russia caught between OPEC and China
Traders also need to be aware that Russia cannot afford to push the oil price too high, as it still relies heavily on China for financial support at the moment. China does not want to see the oil price go to high, as it remains a major consumer of Middle East fuels, even with its side deals for Siberian oil and gas.
Oil prices have hovered between $70-76 in recent months, below the $80.90 per barrel the International Monetary Fund estimates that Riyadh needs to meet its ambitious economic goals and diversify its economy away from dirty fossil fuels. Still, oil prices have remained sluggish despite efforts by the Saudis in particular to tighten supplies over the past year.
Bin Salman, meanwhile, who reportedly made the call to cut, said the cut would be for the month of July but could be extended, describing the measure as a “Saudi lollipop” for the oil-producing cartel.
