Following a significant drop the previous day that brought international oil prices to their lowest point in nearly four months, another wave of depreciation struck the oil marketsAs reported on June 4, West Texas Intermediate (WTI) crude futures fell by 1.52%, settling at $73.09 per barrel, while Brent crude futures dropped 1.35% to $77.30, marking a new low since February.
Many industry insiders attribute this recent plunge in oil prices largely to the outcomes of the OPEC+ meeting held on June 2. Analysts have noted a significant shift in market sentiment and expectations, moving from concerns about OPEC+'s unexpected output cuts supporting prices to questions about when the organization might ease these cuts.
The downturn was particularly evident on June 3, when international oil prices tumbled to new lows
By the end of trading that day, July WTI crude futures closed down by $2.77, or nearly 3.6%, at $74.22 per barrel, the lowest close since February 7. Similarly, August Brent oil futures dropped by $2.75, around 3.39%, to $78.36, refreshing their low close since February 5.
On June 4, oil prices registered yet another declineThe WTI crude futures fell by 1.52% to $73.09, and Brent crude dropped 1.35% to $77.30, both achieving lows not observed since February.
Remarks from those interviewed indicate that the primary catalyst for the current drop in crude oil prices stems from the outcomes of the June 2 OPEC+ meeting.
During this meeting, OPEC+ decided to extend the previous production cut agreement through the end of 2025. Additionally, the organization prolonged the voluntary cut of 2.2 million barrels per day announced by eight member countries in November 2023 until the end of September this year, with a gradual reduction of these cuts depending on market conditions.
Despite the continuation of OPEC+ production cuts, analysts are puzzled by the decline in oil prices
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According to Goldman Sachs, the gradual easing of voluntary cuts reflects a strong desire from multiple OPEC+ members to restore production, despite recent increases in global oil inventories.
The recent OPEC+ meeting signaled to the market an increase in production, showcasing the alliance's plans to relax supply constraintsAnalysts cite that the current market environment, characterized by slow terminal demand growth and uncertainty regarding future economic prospects, coupled with OPEC+'s sizeable spare capacity, offsets the upward price pressure that supply restrictions typically exert on the market, rendering the impact of extended cuts limited.
According to Liu Shunchang, an analyst at Nanhua Futures, the decision from the OPEC+ meeting on June 2 to extend the 2.2 million barrel per day cuts until the third quarter is less than the market had anticipated, which was an extension until the end of the year
Furthermore, it indicates a potential gradual cessation of voluntary cuts starting in the fourth quarter.
Zhao Ruocheng from Haitong Futures pointed out that the timing of the OPEC+ meeting coincided with a broader adjustment in commodity markets that further weakened oil pricesAdditionally, poor performance from the oil market’s demand side has constrained oil prices.
Moreover, the release of disappointing U.Smanufacturing PMI data on June 3, which showed a second consecutive decline, indicates rising downward pressure on the real economyAnother significant factor holding oil prices down is the accumulation trend in global refined product inventories, suggesting that growth in final demand is struggling to absorb supply increases from refinery expansions.
The sluggish recovery in global manufacturing has resulted in weaker diesel demand, while increased refining activity in the Middle East and Russia may lead to additional marginal supply increases, leaving the demand side temporarily lacking effective support for oil prices.
Looking ahead, the outlook for oil prices remains uncertain
Zhao Ruocheng has suggested that, following clarity on the supply side, market focus will shift to demand performanceGiven that the production cuts will extend until the third quarter, a peak demand season follows, and positive signals from either the supply or demand side during this period could bolster market confidence, particularly given the emphasis on trends in demand from China and the U.S.
Additionally, Zhao believes ongoing geopolitical tensions in the Middle East may still pose risks for oil premiumsThe certainty of gradually phasing out cuts in the fourth quarter remains low, with OPEC+ adopting a pricing strategy that dictates output.
“Post OPEC+ meeting, with clarity on production policies for the next quarter, the variables on the supply side are reduced, shifting market attention towards demand dynamics, especially in relation to global macroeconomic growth and refined product consumption,” Liu Shunchang adds.
In Liu's view, the market should monitor a couple of critical factors moving forward
Firstly, macroeconomic trends suggest that expectations for U.SFederal Reserve interest rate cuts within the year remain limited, whereby high interest rates may continue to exert pressure on economic growth in the U.Sand globallyClose attention should be paid to upcoming U.Seconomic data; persistent underperforming results may exert additional pressure on oil prices.
Secondly, on the demand side for refined products, the U.Sis anticipated to enter its seasonal peak for gasoline consumption, but persistently declining gasoline crack spreads and rising gasoline inventories necessitate scrutiny regarding the strength of future gasoline demand.
Guoxin Futures asserts that while the retreat in global oil prices continues to affect both domestic and international oilseed markets, short positions may be liquidated at these lower levels; however, as oil prices remain on a downward trajectory, market adjustments are far from over, suggesting a cautious approach to short-term trading.
Xinh Lake Futures posits that while extending current voluntary cuts until the end of the third quarter seems to indicate a potential for increased future supply, OPEC+ clarified that if exiting voluntary cuts adversely affects the market, it can be readjusted