Supply cuts by major OPEC+ members drive oil prices
ALBAWABA – Oil prices rose Tuesday by more than 1 percent for both Brent and West Texas Intermediate (WTI) crudes, news agencies reported.
Markets are weighing August output cuts by top oil exporters Saudi Arabia and Russia against economic uncertainties worldwide, according to Reuters.
Brent crude futures were up $0.99, or 1.3 percent, to $75.64 a barrel, and WTI crude sold at $70.74 per barrel, up $0.95, or 1.4 percent, Tuesday morning.
On Monday, Saudi Arabia said it would extend its voluntary output cut of 1 million barrels per day to August, Agence France-Press (AFP) reported. Whereas Russia and Algeria reportedly volunteered to lower their output and export levels for August by 500,000 and 20,000 barrels per day, respectively.
In light of the announced production and export cuts, global oil supplies will drop by some 5.36 million barrels per day next month, August 2023, compared to August 2022.
Further output drops are expected in August. As several members of the Organisation of Petroleum Exporting Countries and their allies (OPEC+) are unable to meet their output quotas, PVM analyst Tamas Varga told Reuters.
Nonetheless, Tuesday morning trades suggest little changed is forecast in oil dynamics despite Monday's announcements, OANDA analyst Craig Erlam said.
"Only a significant break above $77 will suggest something has changed, otherwise range-bound trade could well continue," he explained in a statement to Reuters.
Stocks brake their rally
Meanwhile, global stock market trading was light on Tuesday, with United States (US) exchanges closed on the 4th of July, for the Independence Day holiday.
Europe’s Stoxx 600 edged higher, although trading volume was 20% lower than the 30-day average, while US futures saw little change, as reported by Bloomberg.
Real estate stocks lead European market trends, with the shares of Swedish property manager Castellum AB rising on recommendations by DNB Bank analysts, given its attractive valuation.
Belgium’s Warehouses de Pauw CVA also rose after reports bolstered the company’s earnings outlook, Bloomberg reported.
After stocks rallied for the entire first half of 2023, investors have expressed to Bloomberg their concerns over higher interest rates and worsening economic conditions.
The upcoming US nonfarm payrolls report, to come out Friday, will be closely watched for clues on the trajectory of monetary policy, the New York-based news agency underscored.
In the meantime, Citigroup Inc.’s Chris Montagu told Bloomberg that positioning looks “very extended”. He reportedly cited data showing that investors piled into bullish bets on US stock futures toward the end of June.
Oil prices, stocks and the Economy
Usually, higher interest rates draw money out of the stocks market and into secondary and debt markets, as well as into Treasury bonds.
In times of uncertainty, such as long patches of high inflation, investors and traders typically prefer safer assets for their investments. A higher interest rate means higher Treasury bond yields, which is seen as a safe and sure investment.
The US Federal Reserve (Fed) has embarked on a series of consecutive interest rate hikes since March 2022, in an attempt to curb inflation.
Although the Fed had pinned the rates at 5 to 5.25 percent and had paused on further hikes in June, it is possible that the central bank will have to raise the rates in July or August.
In fact, it is forecast that US interest rates may hit or surpass a historic 6 percent in the coming months.
On the other hand, higher interest rates raise energy costs for importers and drive up oil prices in a paradoxical relationship that taints the economic outlook with uncertainty.
With oil demand in China declining and US inventory levels high, especially in times of high inflation and interest rates, it is difficult to predict the global economic outlook in terms of oil demand and prices.
