Oil ends down; Saudi, Russia cuts campaign drowned by factory slump

Investing.com – Right on cue, the Saudis came out to say their million-barrel cut for July will be extended to August and possibly September — maybe even infinitely. The Russians talked up their cuts too. But the announcements coincided with particularly bad global factory activity, sending crude prices lower.

New York-traded West Texas Intermediate, or , settled down 85 cents, or 1.2%, at $69.79 a barrel on Monday.

London-traded crude settled down 76 cents, or 1%, at $74.65 per barrel. 

Oil prices slid after weak manufacturing data out of the United States and Germany took precedence over the output cuts announced by the Saudis and the Russians, who are the biggest producers in the 23-nation alliance of oil producers that calls itself OPEC+. Originally a 13-member group, the Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, have co-opted Russia and nine other producers as allies for nearly a decade now.

The Saudis said on Monday they would extend their July output cut of one million barrels per day, or bpd, to August, adding that the reduction could run for another month after that.

Russian Deputy Prime Minister Alexander Novak said Moscow would cut its oil exports by 500,000 barrels per day in August.

The cuts amount to 1.5% of global supply and bring the total pledged by OPEC+ to 5.16M bpd.

Bad timing for Saudi, Russian cut announcements

OPEC+ already has in place cuts of 3.66M bpd, amounting to 3.6% of global demand, including 2M bpd agreed last year and voluntary cuts of 1.66M bpd agreed in April and extended to December 2024.

“The Saudis might as well say their monthly million-barrel cut will go on infinitely, or at least until a barrel gets to $80 and beyond, because the market knows that’s what they have in mind,” said John Kilduff, partner at New York energy hedge fund Again Capital.

“Whatever the case, they chose to announce it at a particularly bad time, when some of the worst manufacturing data was out too.”

The Institute for Supply Management, or , said its widely-followed manufacturing gauge fell to 46 in June — the lowest since March 2020.  The eighth straight month of readings at below 50, which indicates shrinking activity, is the longest stretch of its kind since 2008-2009. 

“Demand remains weak, production is slowing due to lack of work, and suppliers have capacity,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Companies reduced production and began using layoffs to manage head counts, to a greater extent than in prior months, amid mixed sentiment about when significant growth will return.”

The institute also published select comments from industry to illustrate the data, with feedback from the ‘Computer and Electronic Products’ sector particularly citing concerns over the US economy.

“The slowing US economy is causing the business forecast to be revised/reduced for the remainder of 2023. Customers are less inclined to purchase far in advance,” the comment read.

U.S. gross domestic product, or , saw an annualized growth of 2% for the first quarter of this year, lower than the year-on-year expansion of 2.6% growth in the final quarter of 2022. 

Another quarter with similar slower growth would technically place the United States in recession mode, something the Federal Reserve dreads would be looked upon as its fault following more than a year of aggressive rate hikes by the central bank to fight inflation.

The Fed has been seeking instead for a “soft landing” of the economy, which translates to slower but not negative GDP growth. 

Germany’s , meanwhile, contracted at the fastest rate in more than three years in June, with both output and new orders falling, a survey showed on Monday.

The HCOB final PMI for manufacturing, which accounts for about a fifth of Germany’s economy, fell to 40.6 from 43.2 in May, the fifth consecutive monthly decline.

Aside from the ISM, S&P Global (NYSE:) said its Purchasing Managers Index, or , for June showed a reading of 46.3, indicating the biggest contraction since December in the U.S. manufacturing sector. 

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