Oil Steadies as Traders Grapple With Demand Outlook After Slump

Article content

(Bloomberg) — Oil steadied as investors assessed a complex outlook for global crude demand after a period of volatile trading.

Article content

West Texas Intermediate held above $71 a barrel after surging by more than 4% on Friday, when futures pared a steep weekly loss. While fears of a US recession and bank failures have rattled markets recently, pushing crude to the lowest since late 2021, physical demand signals suggest some of the recent weakness in prices may have been overdone. 

Article content

Traders will get a brace of outlooks this week on how the second half of the year may shape up. The Organization of Petroleum Exporting Countries issues its monthly snapshot on Thursday and, ahead of that, the US Energy Information Administration delivers its short-term outlook on Tuesday. The world’s largest oil producer, Saudi Aramco, will also disclose earnings.

Crude has dropped by about 11% this year as the Federal Reserve’s most aggressive tightening campaign in a generation spurred concerns of a US slowdown or recession, although most investors now expect that policymakers will pause rate increases. The drop has come despite a surprise production cut by OPEC and its allies including Russia. Still, there’s little evidence that Moscow has so far reduced its supply despite a vow to do so.

Article content

Oil’s recent weakness may reflect “an outsized amplification of the real economic dampening, especially given the financial linkages,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. There are now risks of a further “OPEC supply response, or at least jawboning from the group, in an attempt to backstop or shore up prices,” he said.

Goldman Sachs Group Inc. laid the blame for oil’s drop over the past three weeks on a “mostly macro-financial selloff,” according to a note from analysts including Daan Struyven. The bank expects the global market to swing to “large deficits” in the second half, supporting its case for higher prices. 

The prompt spread for global benchmark Brent — the gap between its two nearest contracts — was last at 23 cents a barrel in backwardation. The figure has been fluctuating recently, swinging between 37 cents and 15 cents a barrel in backwardation over the previous week.

Energy Daily, Bloomberg’s daily energy and commodities newsletter, is now available. Sign up here.