Oil price drops amid low demand outlook

Oil prices experienced a decline on Thursday due to concerns about global economic slowdown impacting demand, despite Saudi Arabia’s commitment to reducing output. The previous day saw both benchmarks rise by approximately 1%, supported by Saudi Arabia’s intentions to implement significant production cuts. However, the growth in prices was limited by increasing fuel stocks in the United States and weak Chinese export data.

The week’s report on Wednesday revealed a higher-than-expected surge in U.S. fuel inventories, raising apprehensions about demand from the world’s leading oil consumer. This concern was particularly relevant as the Memorial Day weekend was anticipated to have led to increased travel. The Energy Information Administration (EIA) disclosed that gasoline inventories rose by 2.7 million barrels during the week, surpassing analysts’ predictions of an 880,000 barrel increase. Additionally, distillate stockpiles surged by nearly 5.1 million barrels, exceeding the projected rise of 1.3 million barrels.

Citi analysts expressed their views on Thursday, stating that even if OPEC+ were to implement a 1 million barrel/day cut, it would unlikely provide sufficient support for a sustainable increase in oil prices. They also noted that both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) had optimistic expectations regarding accelerated demand growth by the end of the year.

In an unexpected turn, U.S. crude inventories declined by 451,000 barrels during the week. This was attributed to refiners producing fuel at the highest level since 2019, coinciding with the Memorial Day holiday period.

Overall, despite Saudi Arabia’s proposed output cuts, oil prices faced downward pressure due to concerns over global economic slowdown impacting demand, rising fuel stocks in the U.S., and weak Chinese export data. Analysts questioned the effectiveness of potential production cuts in sustaining price increases and highlighted the optimistic forecasts of both OPEC and the IEA regarding demand growth. The unexpected decline in U.S. crude inventories was attributed to heightened fuel production during the Memorial Day holiday.