On June 3rd, international crude oil futures fell sharply, and US WTI crude oil hit a nearly 4-month low. The settlement price of the main WTI crude oil futures contract in the United States was $74.22 per barrel, a decrease of $2.77 or 3.6%. The settlement price of the Brent crude oil futures main contract was $78.36 per barrel, a decrease of $2.75 or 3.4%. The main reason is that OPEC+, an oil producing country, has decided to gradually lift the voluntary deepening of production reduction space, which is expected to supply a bearish oil market.
Hidden worries about the implementation and supply of OPEC+ policies
On June 2nd, the results of the ministerial level online video conference of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) were released. The organization issued a statement stating that its eight OPEC+ member countries have decided to extend their previous production reduction agreements until the end of the third quarter of this year, with a total daily reduction of 3.85 million barrels, in order to maintain stability and balance in the international petroleum market.
According to the statement, member states have decided to extend the voluntary daily production reduction of 2.2 million barrels announced in November 2023 until the end of September this year, and will gradually withdraw this part of the production reduction efforts depending on market conditions. In addition, the eight countries will extend the voluntary production reduction measure of 1.65 million barrels per day announced in April last year until the end of 2025. But this decision leaves room for the eight member countries to gradually lift voluntary production cuts starting from October. In addition, the organization has agreed to set a new production target for the United Arab Emirates, which has been pushing for an increase in quotas. OPEC+has adjusted its total crude oil production target for 2025 to an average of 39.725 million barrels per day and announced the crude oil production targets for each member next year. But the production target of the United Arab Emirates is to increase the daily average by 300,000 barrels to 3.519 million barrels next year.
The market generally believes that the outcome of this meeting is unfavorable for oil prices, and the gradual cancellation of voluntary production cuts indicates that despite the recent increase in global oil inventories, some OPEC member countries still have a strong desire to restore production. In addition, special regulations for the United Arab Emirates will also increase the cooperation of other member countries in reducing production. This undoubtedly leaves hidden dangers for the expected increase in future supply.
Economic data weaker than expected, increasing concerns about demand
According to the Institute for Supply Management (ISM) Manufacturing PMI data, the manufacturing PMI in May fell from 49.2 in April to 48.7, the lowest level in three months and the second consecutive month of decline. The weak data has intensified investors' concerns about demand. After the data was released, WTI crude oil was the first to be affected, and fuel demand was expected to be bearish.
In addition, the market is waiting for the oil inventory data to be released by the US Energy Information Agency (EIA) on Wednesday, including estimated crude oil and fuel demand, as well as gasoline consumption before and after the Memorial Day weekend (the beginning of the US driving season), which will test the quality of the peak driving season.
But preliminary investigations released on Monday showed that as of the week ending May 31, US gasoline inventories are expected to increase by approximately 1.9 million barrels. The storage of distillate oil, including diesel and heating oil, has increased by approximately 1.8 million barrels. The expected performance of finished oil storage is bearish for the oil market, mainly due to the uncertainty of future demand.
SunSirs crude oil analysts believe that the decline in oil prices is mainly due to the concentrated release of bearish news and the retreat of geopolitical risk premiums. The pricing logic of future crude oil will return to the fundamentals of supply and demand, and the supply-demand game will continue to dominate. The geopolitical situation will continue to weaken, with US crude oil production remaining at a high level, limited space for OPEC to deepen production reduction, and potential supply concerns in the future. In addition, from the perspective of demand, although the peak consumption season in the United States has arrived, the growth level of fuel demand still needs to be tested. Overall, the short-term supply and demand performance is weak, and oil prices will be somewhat suppressed.
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