Oil prices drop as markets digest output cuts

Oil prices retreated a little on Thursday after markets had time to digest the recent OPEC output cuts. WTI price dropped from Wednesday’s $88 per barrel level to $86 per barrel. If WTI price declines, it may encounter support near $77.8 per barrel, while resistance may be found near $90.0 per barrel.

Supply concerns have been driving oil prices up. The OPEC+ alliance has been limiting oil production to keep oil prices up. Oil prices jumped to their highest level in ten months on Tuesday after Saudi Arabia and Russia announced new supply cuts. Saudi Arabia and Russia will extend production cuts that have already been in place for some months now, through the end of the year. Saudi Arabia has been reducing its output by one million barrels a day since early summer and Russia followed shortly after with a reduction of 300,000 barrels a day. Both countries were widely expected to extend the production cuts, but most analysts expected that this strategy would continue to be reviewed monthly and were taken by surprise by this move to extend them by three months.

US Crude oil inventories continued to decline this week after dropping sharply by 10.6M barrels last week. The US Energy Information Agency reported a drop of 6.3M barrels on Thursday, exceeding expectations of a 1.8M barrel drop. Dwindling crude oil inventories provide support for oil prices. 

Deterioration in China’s economic outlook is keeping oil prices down, however. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. Recent data showed that China imported less oil in July, driving the oil demand outlook down.

The Fed’s hawkish monetary policy has reduced oil demand outlook, putting pressure on oil prices. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. 

Federal Reserve Chair Jerome Powell, recently speaking at the Jackson Hole Symposium in the US, warned that the Fed is prepared to raise interest rates further to bring inflation down. Most investors are anticipating a pause in rate hikes, but the US Central Bank has signaled that further tightening is possible if inflation does not go down consistently. The prospect of an end to rate hikes increases the oil demand outlook, boosting oil prices.

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Written by:
Myrsini Giannouli

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