Economic Fears Cripple Oil Trading, But Saudis Express Market Confidence

Meanwhile, conflicting views are expressed regarding impending output cutbacks: File Image/Pixabay

Schizophrenic crude traders on Thursday reached the inevitable loggerhead of interest rate hike fears running up against fundamentals of a tighter oil market, the result being that prices for two key benchmarks barely moved compared to recent sessions.

Brent settled down 13 cents at $76.52 per barrel, while West Texas Intermediate settled up 1 cent to $71.80 per barrel.

The stalemate occurred after it was reported that private payrolls in the U.S. surged last month, bad news for central banks that are attempting to cool down the labour market and looking for further excuses to enact hikes.

Phil Flynn, senior market analyst at Price Futures Group Inc., quipped, "The market is concerned that the Fed has to take the punch bowl away."

At the same time, data from the Energy Information Administration showed that U.S. crude stockpiles fell by 1.5 million barrels in the last week to 452.2 million barrels, compared with expectations for a 1 million barrel decline; gasoline and distillate inventories also dropped.

But it's unclear why this disclosure buoyed Thursday's oil trading, as it too is a sign that the American economy is robust and therefore more reason for the banks to hike rates in their bid to tame inflation.

Also on Thursday, Saudi Arabia lifted official selling prices for its flagship Arab Light crude to all regions, a clear indication it is confident about demand and something that caused prompt time-spreads to tighten in the belief that buyers will turn to the Atlantic Basin and tighten Brent and US crude markets.

Rebecca Babin, a senior energy trader at CIBC Private Wealth, said, "I think Saudi Arabia realizes that there is a mismatch between the different grades of crude due to the production cuts and is trying to recalibrate regional grades by raising its OSP and forcing buyers to other regions.

"This is really threading the needle and shows just how hard it is balance markets in current environment."

Meanwhile, John Kemp, commodities analyst for Reuters, noted that "the fall in prices and drilling rates since late 2022 is set to reduce output in the second half of 2023 and tighten markets for both oil and gas later this year and into 2024."

But the prospect of reduced output in general frightened Wael Sawan, CEO of Shell, who told the BBC on Thursday that any cuts to oil and gas production would be "irresponsible" considering the world economy is so heavily dependent on fossil fuels.

Sawan said, "The energy system of today continues to desperately need oil and gas, and before we are able to let go of that we need to make sure that we have developed the energy systems of the future — and we are not yet, collectively, moving at the pace [required for] that to happen."

Sawan also responded to U.N. secretary-general Antonio Guterres' remark that investing in new fossil fuels systems would be "moral and economic madness" by firing back, "I think what would be dangerous and irresponsible is actually cutting out the oil and gas production so that the cost of living — as we saw just last year — starts to shoot up again."