Oil prices flatline as Saudi Arabia fails to prop up prices with heavy cuts
Oil prices have failed to take off following OPEC’s decision to sustain heavy output cuts and Saudi Arabia’s call to unilaterally slash production by a further million barrels per day.
Both major benchmarks have effectively flatlined in this evening’s trading session, with Brent Crude down 0.16 per cent at $76.59 per barrel and WTI Crude sliding 0.04 per cent to $72.12 per barrel – firmly below Saudi Arabia’s prized break-even point of $80.
This follows Brent Crude gaining $2.60 per barrel and WTI $3.30 per barrel respectively in yesterday’s trading, after Saudi Arabia confirmed its production levels would from 10m barrels per day to 9m.
However, sluggish growth in China and potential recessions in the US and Europe have effectively offset Saudi Arabia’s latest cuts, weighing down expectations for demand.
Oil experts also argue this reflects disunity within the world’s most influential oil cartel – with Saudi Arabia more hawkish than its partners – which are remaining more conservative.
Callum Macpherson, head of commodities at Investec, told Morning Wire: “So far as the balance of the market now and the short-term price outlook are concerned, OPEC have done nothing and look as if they won’t do anything.
“This means the question for the market is whether Saudi Arabia, by itself, has the capacity and willingness to manage the market. Clearly there is a fear that it does not.
“The stakes are high and the Saudis must be hoping that demand picks up in the coming weeks and the much talked about increase in second half demand, materialises.”
Craig Erlam, senior market analyst at Oanda, argued the Saudi Arabia had even risked undermining the perception of OPEC in markets – making it seem ineffective.
He said: “The drop we’ve seen in oil prices more reflects an unwillingness among OPEC+ to prop up markets, as opposed to an inability to. The group may have agreed to further cuts next year as fundamentals have deteriorated, but Saudi Arabia going it alone from July spoke volumes about how aligned the rest of the alliance is with its price obsession. This divide, and the weakness it highlights, is what is pressuring the price.
“Saudi Arabia may have been better saying nothing last week and either acting unexpectedly or doing nothing at all. OPEC+ strength is in its collective influence. Saudi Arabia’s unilateral move has thrown that into doubt.”
Meanwhile, the US dollar has risen to its highest level this month against an array of currencies, which could weigh on demand by making fuel more expensive for holders of other tenders.
There are also plenty of factors that could drive prices, which remain unconfirmed.
Investors are currently awaiting fresh signals on whether the US Federal Reserve will hike or hold interest rates this month, and the latest trade data from China – the world’s second-biggest oil consumer – which is expected tomorrow.
Ole Hansen, head of commodity strategy at Saxo Bank, argued that price rallies were still likely in the second half of the year – with demand expected to rebound in Asia over the summer.
“The overall sentiment among analysts has in recent month been heavily leaning to a tightening crude oil market during the second half of 2022 with OPEC’s own data indicating that global oil demand will exceed supplies by an average of roughly 1.5m barrels per day in the second half of the year,” he concluded.