Oil up as OPEC+ cuts override China, US demand concerns

Oil prices rebounded slightly on Wednesday after four days of declines as signs of supply tightness amid output cuts by major producers overrode demand concerns in China and the US, the world’s two biggest crude consumers.

Brent crude futures were up 53 cents, or 0.65%, to $82.57 a barrel at 0922 GMT, while US West Texas Intermediate crude futures rose 64 cents, or 0.82%, to $78.79 a barrel, after declining the past two days.

China’s 2024 economic growth target of around 5% set on Tuesday lacked big-ticket stimulus plans to bolster its struggling economy, raising concerns of sluggish oil demand growth.

The market “specifically was hoping to see further fiscal expansion to help meet the growth target,” said Tony Sycamore, an analyst at IG in Sydney.

Eyes are now on US Federal Reserve Chair Jerome Powell’s semi-annual monetary policy testimony to Congress on Wednesday and Thursday and Friday’s US employment data, Sycamore said.

Friday’s US non-farm payrolls data is expected to show an increase of 200,000 jobs in February after surging 353,000 in January, according to a Reuters survey of economists. Powell’s comments and the jobs data could provide clearer direction on US interest rates, and signs of a Fed cut would be seen as positive for the economy and oil demand.

Oil prices were lifted by the announcement on Sunday that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) extended output cuts of 2.2 million barrels per day until the end of the second quarter.

The extension has created some supply tightness, particularly in Asian markets, along with the disruption in oil tanker movements as a result of the Red Sea attacks by the Houthi militia in Yemen that is tying up barrels in transit.

That physical tightness was apparent as Saudi Arabia, the world’s biggest oil exporter, announced on Wednesday slightly higher prices for April crude sales to Asia, its biggest market.

The first of this week’s two US inventory reports, from the American Petroleum Institute industry group, showed US crude stocks rose by 423,00 barrels in the week ended March 1, market sources said, much smaller than the increase of 2.1 million barrels, expected by analysts in a Reuters poll.

Official data from the US Energy Information

Administration is due on Wednesday at 10:30 a.m. ET (1530 GMT). Brent futures were down 41 cents to $83.14 a barrel at 1218 GMT after rising 2.4% last week. U.S. West Texas Intermediate (WTI) fell 52 cents to $79.45 a barrel following a 4.6% gain last week.

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) are extending their voluntary oil output cuts of 2.2 million barrels per day (bpd) into the second quarter to cushion the market amid global economic concerns and rising output outside the group.

Although Russia’s announcement to cut its oil output and exports by an additional 471,000 bpd in the second quarter surprised some analysts.

Russia’s additional cut is closely correlated with a 400,000 bpd drop in the country’s refinery runs, largely stemming from Ukrainian drone strikes on refining assets across Russia, lead crude oil analyst at Kpler Viktor Katona said.

While there has been little price movement because the OPEC+ decision had been expected, low-sulphur, or sweet, crude markets are tightening, widening Brent spreads, traders said.

The premium of the first-month Brent crude contract to the six-month contract reached $4.56 a barrel. This structure, called backwardation, indicates a perception of tight prompt supply.

This widening Brent backwardation implies that dips in the market ought to be short-lived, Tamas Varga of oil broker PVM told Reuters.

The OPEC+ cuts would lead to a lower production from the group at 34.6 million bpd in the second quarter against an earlier forecast that output could rise above 36 million bpd in May as producers unwind supply cuts, Jorge Leon, a senior vice president at consultancy Rystad Energy said.

“This new move by OPEC+ clearly shows strong unity within the group, something that was put into question after the November ministerial meeting, which saw Angola leaving OPEC,” he said.

“It also shows robust determination to defend a price floor above $80 per barrel in the second quarter.”

Rising geopolitical tensions due to the Israel-Hamas conflict and Houthi attacks on Red Sea shipping have supported oil prices in 2024, although concern about economic growth has weighed.

Yemen’s Iran-backed Houthis vowed on Sunday to continue targeting British ships in the Gulf of Aden following the sinking of the Rubymar cargo ship.