U.S. crude oil prices have extended their recent losing streak, falling nearly 2% on Tuesday and erasing most of the gains accumulated over the year. This decline follows the announcement by OPEC+ to increase production starting in October. The decision has significantly impacted market sentiment, leading to a broader sell-off in the energy sector.
As of Tuesday, the West Texas Intermediate (WTI) July contract dropped to $72.90 per barrel, a decrease of $1.32 or 1.78%. This marks the fifth consecutive session of declines for U.S. crude. Brent crude for August delivery also fell, settling at $77.14 per barrel, down $1.22 or 1.56%. Despite these losses, year-to-date gains for U.S. crude and Brent remain at 1.73% and 0.12%, respectively. In contrast, RBOB Gasoline futures for July decreased by 1.12% to $2.30, while Natural Gas futures rose by 1.74% to $2.80, reflecting an 11.38% increase year-to-date.
The decision by OPEC+, led by Saudi Arabia and Russia, to phase out 2.2 million barrels per day (bpd) of production cuts over a 12-month period beginning in October has been a significant driver of the recent price declines. This move was unexpected and has led to concerns about potential oversupply in the market. "The market reaction is depressing to anyone who produces oil and brings elevated joy for consumers," noted Tamas Varga, an analyst at oil broker PVM. Varga highlighted that the announcement of the gradual reversal of voluntary cuts was primarily responsible for the bearish sentiment in the market.
Adding to the downward pressure on oil prices are concerns about the U.S. economic outlook. A recent report indicated that the U.S. manufacturing sector is contracting, with the Institute for Supply Management's manufacturing index falling to 48.7% in May from 49.2% in April. Numbers below 50% signal a contraction in the manufacturing sector, raising worries about future demand for oil.
The combination of increased supply from OPEC+ and fears of weakening economic growth has created a challenging environment for oil prices. Analysts are cautious about the future trajectory of prices, given the current market dynamics. Carsten Fritsch, a commodity analyst at Commerzbank, expressed skepticism about OPEC+'s ability to reduce production cuts without risking oversupply. "The price weakness on the oil market suggests that market participants doubt that OPEC+ will be able to gradually reduce its voluntary production cuts without risking oversupply," Fritsch said. He also noted that while the immediate impact might not be severe, the situation could change next year if the anticipated demand revival does not materialize.
Despite these concerns, some analysts believe the downside for oil prices may be limited. Varga suggested that summer gasoline demand could provide some support for prices, potentially offsetting some of the bearish factors. Moreover, the recent sell-off in oil prices could help ease global inflationary pressures, providing some relief to consumers and businesses alike.
The broader implications of the OPEC+ decision and the economic outlook in the U.S. will likely continue to influence oil prices in the coming months. As the market adjusts to the new supply dynamics and economic data, volatility is expected to remain a key feature.
