Oil Up On Prospect Of Tightening Supply As Saudis Send A Warning

However, the market is still largely governed by bearish sentiment: File Image/Pixabay

Crude traders who spent the better part of last week reacting negatively to prospects of waning demand due to inflation and other factors made an about face on Tuesday, based on reports of tightening supplies, and caused the commodity to rise by over 1 percent.

After the American Petroleum Institute reported a large draw in crude and gasoline last week (yet to be confirmed by the Energy Information Administration but which heralds declines for the third straight week), West Texas Intermediate ended at $72.91 per barrel, up 86 cents, or 1.2 percent.

Brent rose 85 cents, or 1.1 percent, to settle at $76.84 per barrel.

Sudden concerns of tightened supply were exacerbated by prince Abdulaziz bin Salman, energy minister for Saudi Arabia, who told  the Qatar Economic Forum, "Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don't have to show my cards I'm not a poker player... but I would just tell them watch out."

Standard Chartered analysts said in a note that short speculative positions are now in the same position as they were at the start of the pandemic in 2020: bearish, and they added that "We think the latest build-up in short positions significantly increases the probability of further production cuts when OPEC+ meets."

That meeting of the Organization of the Petroleum Exporting Countries occurs on June 4 in Vienna.

Craig Erlam, analyst at Oanda, noted that the cartel may consider further output cuts, but "Of course, actions speak louder than words and traders haven't been overly deterred by his words, despite the group having announced two sizeable cuts in the last year that briefly shook the markets."

But despite the price gains on Tuesday, trading sentiment remains muted and toward bearish territory, not helped by another round of debt talks in the U.S. ending with no agreement to raise Washington's debt ceiling to $31.4 trillion.

White House spokesperson Karine Jean-Pierre said, "What we're trying to get to is a budget that is reasonable, that is bipartisan, that Democrats and Republicans in the House and Senate will be able to vote on and agree on."

With all of these factors and more in play, Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, concluded that "[Oil] prices are likely to remain within their broad year to date trading range as the economy continues to slow while the refill of the Strategic Petroleum Reserve and OPEC manages prices relative to global demand needs."