Oil sinks on uncertainty over OPEC production cuts

Oil prices dipped on Thursday, with WTI price touching $71 per barrel. If the WTI price declines, it may encounter support near $73.9 per barrel, while resistance may be found near $74.6 per barrel.

Oil prices are supported by limited supply, as OPEC+ producers recently decided to reduce output by 1.1 million barrels per day, to offset the drop in oil prices from the global banking crisis. This week, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman warned traders against shorting oil futures. OPEC+ is meeting again on June 4 and the Saudis’ warning has fuelled speculation on further production cuts. On Thursday, however, Russian Deputy Prime Minister Alexander Novak downplayed the prospect of further OPEC+ production cuts at next week’s meeting.

U.S. crude oil inventories declined by 12.5 million barrels, against expectations of an 800K barrels raise, boosting oil prices. According to a report by the Energy Information Administration on Wednesday, the decline was mainly due to a drop in imports. 

Oil prices are also boosted by diminishing rate hike expectations. US Federal Reserve Chair Jerome Powell indicated that the US Central Bank may pivot towards a more dovish direction. The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. The US Central Bank has signaled that its hawkish policy is coming to an end, providing support for oil prices. As major central banks are winding down their hiking cycles, the oil demand outlook rises. The minutes of the latest Fed meeting were released on Wednesday, increasing the odds of a pivot in the Fed’s policy direction. According to the FOMC minutes, several Fed members advocated for a pause in rate hikes during the Fed’s last meeting in May.

Oil prices have been under pressure, as mounting economic risks reduce the oil demand outlook. Recession concerns run high and aggressive rate hikes stifle economic activity, putting a lid on oil prices. The potential of a banking sector meltdown has also reduced the oil demand outlook. 

US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. On Wednesday, Yellen reiterated that the US debt ceiling deadline remains in early June and cannot be extended without the US missing payments. The ongoing debate around the US debt ceiling is causing economic uncertainty, pushing oil prices down. Last week, House Speaker McCarthy and President Biden started talks on the debt ceiling. The two leaders have yet to reach an agreement on the US debt ceiling, but negotiations continue. 

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Written by:
Myrsini Giannouli

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