May 6, 2023 [mint] – Oil prices edged higher on May 5 but were poised for a third straight week of losses – its longest losing run this year so far, after markets registered drops on fears of a weakening US economy and slowing Chinese demand.
The slowdown has prompted investors to flee from risk leading to selloffs.
Brent crude oil futures rose $1.22, or 1.7 per cent, to $73.72 a barrel, while the US West Texas Intermediate was last up $1.11, or 1.6 per cent, at $69.67 after four days of declines that sent the contract to lows last seen in late 2021. The Brent benchmark was on track to finish the week with a decline of about 7 per cent while WTI was set for a 9 per cent loss.
Oil has slumped 14 per cent this year even after a decision by the Organization of Petroleum Exporting Countries (OPEC) and its allies or OPEC+, to cut production from this month. The retreat has come despite signs of strength in the physical oil market, suggesting the selloff may be excessive.
What is behind the selling frenzy?
The turmoil in the US banking sector and oil production cuts announced by OPEC+ have infused worries of price rise and global recession in the market. This has largely prompted investors to let go before it gets too late.
“Rather than underlying fundamentals, the selling frenzy over the past week has been driven by worries about demand linked to recession risks and the strain in the US banking sector,” PVM oil market analyst Stephen Brennock told news agency Reuters.
“The upshot is that there is a big disconnect between oil balances and oil prices. These dislocations tend to be temporary and normal order should soon be restored.”
The weakened demand from China also contributed to the frenzy as the country’s factory activity contracted unexpectedly in April. Orders dropped and poor domestic demand dragged on the sprawling manufacturing sector. Service activity in China grew for the fourth month in April, though the rate of this expansion has slowed.
China’s service activity grew for a fourth month in April, a private-sector survey showed on Friday, as businesses benefitted from a return toward pre-pandemic levels of demand and output, although the momentum slowed.
The Caixin/S&P Global services purchasing managers’ index (PMI) stood at 56.4 in April, above the 50-point mark that separates expansion and contraction in activity on a monthly basis, down from 57.8 the month prior.
Is oil headed for its worst run in 2023?
Crude oil has been battered by growing concern that the US economy is on track to slide into a recession, potentially hurting energy consumption, just as investors track signs of continued instability among regional lenders. Even though te dollar weakening against other currencies this week helps support oil, making it cheaper for holders of other currencies.
Additionally, Saudi Arabia, the world’s top oil exporter, has cut the price of its June flagship crude to Asian buyers for the first time in four months, following a plunge in refining margins.
The official selling price (OSP) for June-loading Arab Light to Asia was reduced by 25 cents a barrel from May to $2.55 a barrel over Oman/Dubai quotes, according to a statement issued by state oil giant Saudi Aramco.
“While sentiment is negative at the moment, the market is in oversold territory and our balance sheet still shows that the market will be in deficit over the second half of the year, which should drive prices higher,” Warren Patterson, head of commodities strategy for ING Groep NV told Bloomberg.
“The upshot is that there is a big disconnect between oil balances and oil prices,” said PVM’s Brennock. Analysts also said oil demand concerns were overblown and expect a price correction upward in coming weeks.