By Giulia Petroni
Here's a look at what happened in oil markets in the week of June 3-7 and what the focus will be in the days to come.
OVERVIEW: Oil prices are on track for weekly losses after the Organization of the Petroleum Exporting Countries and its allies set out a plan to gradually bring some barrels back into the market later this year, raising concerns of oversupply and sparking a selloff. Brent crude, the international oil benchmark, trades at around $79.60 a barrel, while the U.S. oil gauge West Texas Intermediate is at around $75.40 a barrel. Both benchmarks rebounded on Thursday after plunging to four-month lows earlier in the week.
MACRO: Expectations that the Federal Reserve will implement its first interest-rate cut in September seemed to be growing among traders this week, with market sentiment boosted by the European Central Bank lowering interest rates by a quarter point--the first cut in almost five years. Dovish sentiment around Fed cuts is positive for oil markets, as lower borrowing costs tend to boost demand for the commodity.
But data from the Labor Department released on Friday showed U.S. job growth accelerated far more than expected in May, furthering the view that the U.S. central bank will have to wait to start cutting rates. Nonfarm payrolls increased by 272,000 jobs last month, while the unemployment rate rose to 4% from 3.9% in April. According to CME Group data, interest-rate futures showed Friday that investors now see a greater than 40% chance that the Fed will hold rates steady past its September meeting, up from 31% on Thursday.
GEOPOLITICAL RISKS: Analysts continue to price in a geopolitical risk premium as Russia's war in Ukraine and the war in Gaza aren't expected to be resolved in the near term, even though the conflicts haven't significantly disrupted oil supplies so far. U.S. and Arab mediators continue to push for a ceasefire and hostage release deal between Israel and Hamas, but talks are at a standstill, with Israel saying it will continue its war until Hamas' military and governance capabilities are destroyed despite growing international outrage due to the civilian death toll and humanitarian disaster in Gaza.
SUPPLY AND DEMAND: OPEC+'s plan to gradually unwind voluntary output curbs of 2.2 million barrels a day from October 2024 to September 2025 led to a sharp fall in oil prices amid concerns over supply and demand balances next year.
According to analysts, the plan reflects a desire to bring barrels back given the group's high spare capacity and rising production from countries outside of the alliance, but is also expected to result in an oversupplied market next year. OPEC+ ministers rejected the bearish reaction at the St. Petersburg International Economic Forum on Thursday, with Saudi Energy Minister Prince Abdulaziz bin Salman predicting the market will soon come around and reiterating that the alliance retains the option to pause or reverse production increases based on market conditions.
Also, Saudi Arabia this week cut the July price for its flagship Arab Light crude to Asian customers after three consecutive raises amid uncertainties over the demand outlook.
Meanwhile, data from the Energy Information Administration was bearish for oil, as U.S. commercial crude oil stocks rose by 1.2 million barrels in the week ended May 31, against expectations of a 1.6 million barrels fall. Also gasoline and distillate inventories rose, adding to concerns over the demand outlook given that the week reflected fuel usage during Memorial Day weekend, which typically kicks off the summer driving season.
WHAT'S AHEAD: Next week will be a busy one for oil markets, with OPEC, the International Energy Agency and the Energy Information Administration releasing their monthly reports.
According to analysts, the three agencies are likely to confirm the market is expected to remain undersupplied in the second half of the year. Meanwhile, OPEC's overall production, data on industrial oil inventories in OECD countries and forecasts on U.S. oil production will be key areas of focus for market watchers.
At a macro levels, all eyes will be on the U.S. Consumer Price Index on Wednesday, the Federal Reserve's policy decision and Chair Jerome Powell's press conference for more cues on the path of interest rates in the top consumer.
Write to Giulia Petroni at giulia.petroni@wsj.com
(END) Dow Jones Newswires
06-07-24 1246ET
