The price of Brent crude ended the week at $79.56 after closing the previous week at $81.37. The price of WTI ended the week at $75.38 after closing the previous week at $77.16. The price of DME Oman crude ended the week at $80.09 after closing the previous week at $82.08.
The oil market sold off even with the news that OPEC+ had agreed at its June meeting to extend production cuts through the rest of the year, including eight producers agreeing to maintain their voluntary cuts of 2.2 MMbbl/d at least through March of next year. The selloff stemmed, in part, from OPEC+ also announcing intentions to trim the cuts through September of next year. This part of the agreement raised concerns about the possibility of OPEC+ bringing barrels back to the market before additional supply is warranted by demand. We think the oil market overreacted to the announcement because it is our view that OPEC+ will continue to be proactive in aligning supply with demand. That said, the recent survey of OPEC production provided by Reuters highlights the inherent challenges of maintaining discipline and cohesion between the members:
- It is estimated that OPEC supplied 26.63 MMbbl/d in May, which is an increase of 145,000 bbl/d from April;
- The OPEC supply for May was about 250,000 bbl/d more than the implied target for the nine members covered by supply-cut agreements;
- Iraq and Nigeria each increased output by 50,000 bbl/d, while Saudi Arabia and UAE had slight increases in supply; and
- Iran and Venezuela (neither are required to reduce production) also increased their production.
Some positive news was provided by Kazakhstan, which reduced production by around 6% in May with production decreasing to 1.451 MMbbl/d and 17,000 bbl/d below its quota of 1.468 MMbbl/d for the first half of 2024. Kazakhstan had agreed to reduce production to account for exceeding its quota during previous months. Also, last week, Russia reiterated its intention to reduce production to align with the agreed OPEC+ supply cuts. Additionally, the latest EIA report illustrates that U.S. production growth has stagnated with U.S. oil production remaining at 13.1 MMbbl/d, which is unchanged from the previous 12 weeks. Last week, the number of operating oil rigs in the U.S. decreased by four and now stands at 492, which compares to the pre-COVID-19 level of 683 that occurred during the week of March 13, 2020. One year ago, the U.S. oil rig count was 556. Increasing U.S. supply will be a challenge unless U.S. producers start ramping up their capex and drilling programs beyond their current plans
Last week’s price movement also reflects the market’s reaction to the disappointing economic news associated with the leading economies – the U.S., EU and China. The data from last week had some bright spots, but there are still signs of underlying weaknesses:
- On June 7, the U.S. Bureau of Labor Statistics released the latest jobs data, which showed that 272,000 nonfarm jobs were added in May on the basis of the establishment survey. In contrast, the household survey showed that full-time jobs decreased by 187,000 while part-time jobs increased by 51,000. Additionally, the U6 unemployment rate (includes discouraged workers and those holding part-time jobs for economic reasons) increased to 7.3% – and the number of job openings based on the JOLTs report (Job Openings and Labor Turnover Survey) decreased to 8.06 million in April, which is the lowest since February 2021.
- As we and others have been expecting, the ECB moved forward with reducing interest rates from 4% to 3.75%, which is the first rate cut taken by the ECB since 2019. We think, however, that the ECB will wait for further rate cuts, in part, because we expect that the U.S. Federal Reserve will not make any rate cuts before the presidential election in November – and that the ECB does not want to get too far ahead of the Federal Reserve.
- In contrast to the recent series of disappointing economic data, China’s export data for May surprised to the upside with China’s exports increasing by 7.6% in comparison to the previous year. Additionally, the increase was the highest since April 2023. China’s imports, however, only increased by 1.8%, which is significantly down from the 8.4% increase of the previous month. The slowing growth of imports is consistent with weakness in domestic demand, as indicated by retail sales of consumer goods increasing by only 2.3% in April, which is the smallest increase since December 2022. The growth in retail sales of consumer goods has been on a downward path since November 2023 when the growth rate (year-on-year) was around 10% after rebounding back to the level typical of the pre-COVID period.
For a complete forecast of refined products and prices, please refer to our Short-term Outlook.
About the Author: John E. Paisie, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.
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