Oil futures gave up modest gains Wednesday after the Organization of the Petroleum Exporting Countries cut its outlook for growth in crude demand in 2022 and 2023 in the face of mounting economic fears.
Traders also digested a hotter-than-expected U.S. producer price index reading, which was seen reinforcing expectations for aggressive Federal Reserve interest rate increases.
West Texas Intermediate crude for November delivery
fell $1.14, or 1.3%, to $88.21 a barrel on the New York Mercantile Exchange after posting a loss of nearly 2% on Tuesday.
November natural gas
rose 0.7% to $6.643 per million British thermal units.
OPEC, in its monthly report released Wednesday, forecast oil demand to grow by 2.64 million barrels a day, or mb/d, this year, down from 3.1 mb/d in its September report. Growth in 2023 is now seen at 2.34 mb/d versus last month’s estimate of 2.7 mb/d.
The revised estimates come after the cartel and its Russian-led allies last week agreed to cut production by 2 million barrels a day starting in November, a move that fed a sharp bounce by crude futures, angered the Biden administration and strained relations between the U.S. and Saudi Arabia, OPEC’s de facto leader.
The cut is expected to result in a reduction of around half the 2 million barrel a day figure because several producers were already pumping below their individual targets. The cut was still seen as substantial given continued signs of tight physical supplies.
OPEC’s production cut sent oil sharply higher last week, while President Joe Biden’s fiscal policy options are limited and U.S. producers appear unlikely to take the opportunity to boost market share, said Stewart Glickman, analyst at CFRA, in a note.
“This combination, in our view, probably supports elevated crude oil prices over the next 12 months — but recession risk remains,” he wrote.
Meanwhile, fears that aggressive monetary tightening by the Fed and other central banks could spark a sharp global economic downturn were reinforced after the September producer price index showed inflation at the wholesale level continued to run hotter than expected.
Phil Flynn, senior market analyst at The Price Futures Group, said in his energy report Wednesday that he’s “worried about the demand side of the equation — not only the slowing global economy but concerns about more China lockdowns.”
At the same time, however, “the reality is that even with slowing demand the supply side is still dangerously low,” he said.
The Energy Information Administration will release its weekly U.S. petroleum inventory report on Thursday morning, a day later than usual because Monday was a federal holiday.
On average, analysts polled by S&P Global Commodity Insights forecast a supply climb of 2.2 million barrels for crude, and inventory declines of 2.1 million barrels for gasoline and 2.3 million for distillates.