Saudi cut, rate hikes & more: Key factors driving crude oil markets next week

In a second straight day of losses, Brent crude closed down 29 cents, or 0.4 per cent, to $73.85 a barrel on June 23, while US West Texas Intermediate (WTI) crude fell 35 cents, or 0.5 per cent, at $69.16. The benchmarks declined more than 3.5 per cent for the week.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a July 19 expiry, settled lower at 0.42 per cent at ₹5,879 per bbl, having swung between ₹5,546 and ₹5,690 per bbl during the session on June 23, compared to their previous close of ₹5,705 per bbl.

Also Read: Higher CPI, volatile stocks and yields: RBI explains how OPEC decisions impact Indian economy

Rate hikes, Saudi Arabia’s output cuts, and more: Key factors driving crude oil markets next week:

-Market participants and analysts will remain cautious ahead of Saudi Arabia’s production cuts of 1 million barrel per day starting from July 1, which was part of a broader output-limiting deal by the Organization of the Petroleum Exporting Countries and its allies, or OPEC+. On June 4, OPEC+ decided to reduce overall production targets from 2024 by a further total of 1.4 million bpd. While OPEC cartels’ dominant member – Saudi Arabia, has announced its supply cut from July, the rest of the OPEC producers agreed to extend earlier cuts in supply through the end of 2024.

-More US interest rate hikes are likely to be announced as US Federal Reserve Chair Jerome Powell said last week that two more rate hikes of 25 basis points each by the end of the year was “a pretty good guess.” San Francisco Federal Reserve Bank President Mary Daly said two more rate hikes this year was a “very reasonable” projection.

-Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and reduce oil demand. Gains in the dollar, drawing support from the hawkish comments from global central banks also weighed on oil prices. A strong dollar makes oil more expensive for other currency holders and can hit demand and indicate higher risk aversion among investors.

-China’s promising economic recovery has faltered with several months in a row of softer-than-expected consumption, production and property market data. The recession and demand concerns outweighed signs of supply-side tightness.

-US energy firms cut the number of oil rigs operating for an eighth week in a row, energy services firm Baker Hughes Co told news agency Reuters. US oil rig count, an indicator of future output, fell 6 to 546 this week, the lowest since April 2022. Last week’s US inventory report showed crude stocks posted a surprise decline of 3.8 million barrels.

What analysts say

“There seems to be a growing ‘risk back off’ type of trade now in crude, triggered by the interest rate rises in the EU and disappointing stimulus numbers out of China,” Dennis Kissler, senior vice president of trading at BOK Financial told Reuters. The Bank of England rate rise triggered fund liquidation and energy producers were moving to a “hedge now” mentality, Kissler added.

Money managers raised their net long US crude futures and options positions in New York and London by 4,790 contracts to 78,064 in the week to June 20, the Us Commodity Futures Trading Commission (CFTC) said on Friday.

The Reserve Bank of India (RBI) in its June 2023 bulletin has revealed that India’s domestic crude oil basket, equity prices of oil and gas sector firms and sovereign bond yields witness high volatility during the oil output decisions by OPEC+.

Economic indicators such as consumer prices in India and domestic output, along with key financial indicators such as INR, bond yields, and stock prices have shown movements to OPEC+ oil supply decisions, according to RBI.

While domestic currency appreciates against the US dollar on the impact of oil supply shock, surprise changes in expectations about future oil supply are expected to lead to an increase in oil inventories raising the domestic demand for US dollars to purchase available crude oil in the market. This leads to a depreciation of the domestic currency (INR) over time as seen in the medium-term response of exchange rate to oil supply news shocks.

RBI revealed that not only do financial markets react to supply-related announcements by the OPEC, domestic output falls and consumer prices increase as a result of oil supply news shocks.

‘’The decision of Chinese central banks to cut rates after a 10-month pause has raised concerns about the health of the Chinese economy. Despite these global concerns, the domestic market is not anticipated to undergo a significant correction. This is due to favourable domestic economic indicators and a correction in international commodity prices, which are expected to sustain earnings growth on a QoQ basis,” said Vinod Nair, Head of Research at Geojit Financial services.

Updated: 25 Jun 2023, 10:13 PM IST