Oil futures experienced a rally as Saudi Arabia and Russia announced production cuts ahead of the release of API stock data. The Saudi energy minister stated at OPEC’s annual seminar in Vienna that they would not leave the market unattended and would do whatever was necessary to support it. Russian Deputy Prime Minister Alexander Novak also confirmed that Russia would cut production and exports by an additional 500,000 barrels per day (bpd) in August.
The latest data published by Bloomberg supports these statements, showing a decline in Russian oil exports from the eastern ports of Primorsk and Kozmino by almost 700,000 bpd in the final weeks of June. This decline indicates that the promised production cuts are indeed taking place.
When combined with the reductions already made by Saudi Arabia and Russia, as well as ongoing cuts by other countries in OPEC+, the total curtailments will amount to 3.1 million bpd, or approximately 3% of global consumption. This is a significant reduction in global supplies. However, despite these output cuts, oil prices have remained stagnant, with Brent crude trading between $70 and $80 per barrel (bbl) since May 1.
The market’s muted reaction can be attributed to weak manufacturing data indicating a full-fledged recession in global industrial hubs like China and the United States. Recent industrial data revealed that U.S. manufacturing activity slid deeper into contraction last month, reaching its lowest level since May 2020 at 46%. This data reflects companies continuing to decrease output as demand deteriorates and optimism for the second half of 2023 weakens.
Oil traders have also positioned themselves ahead of the release of weekly U.S. inventory data, starting with a preliminary survey from the American Petroleum Institute and followed by official data from the U.S. Energy Information Administration. The reports were delayed by one day this week due to the observance of U.S. Independence Day on Tuesday.
Analysts anticipate that U.S. crude oil inventories likely decreased by 1.6 million bbl for the final week of June. Estimates for the drawdown range from 3.4 million bbl to a build of 2.2 million bbl. This expected drawdown comes despite a U.S. Department of Energy report indicating that 1.4 million bbl of crude was disbursed last week from the nation’s Strategic Petroleum Reserve. This would further deplete the emergency crude supplies, which are already at a 40-year low, to 347.2 million bbl.
Gasoline inventories are expected to have fallen by 900,000 bbl from the previous week, while stocks of distillates, primarily diesel fuel, are expected to have risen by 300,000 bbl from the previous week. Refinery use is likely to have remained unchanged from the previous week at 92.2% of capacity.
At settlement, NYMEX West Texas Intermediate August futures increased by $2 per bbl to $71.79 per bbl. The international crude benchmark Brent contract for September rose $0.40 to $76.65 per bbl, following a $1.60 advance on Tuesday when the U.S. market was closed for Independence Day. NYMEX RBOB August futures saw a gain of $0.0559, reaching $2.5183 per gallon, while the ULSD August contract rallied by $0.1160 to $2.4933 per gallon.
Overall, the oil market rallied as Saudi Arabia and Russia implemented production cuts and promised further reductions. However, the impact of these cuts on oil prices has been minimal due to weak manufacturing data signaling a global recession in key industrial hubs. The upcoming release of U.S. inventory data will provide further insight into market conditions and potentially impact future oil prices.
