Bearish Sentiment Deepens Despite Significant Output Cut Extensions

Not even a record U.S. airline travel Friday could break the trading gloom: File Image/Pixabay

Despite two major oil producing nations announcing an extension of voluntary cutbacks, crude prices on Monday incurred another round of losses, this time on the order of 1 percent, as traders continued to obsess over impending interest rate hikes and their potential effect on demand.

Brent settled down 1 percent, or 76 cents, at $74.65 per barrel, while West Texas Intermediate settled down 1.2 percent, or 85 cents, to $69.79 after Saudi Arabia decided to extend production cuts of 1 million barrels per day (bpd) through August and Russia said it would cut exports by 500,000 bpd throughout that month.

The kingdom also suggested that its extension could be lengthened if the market warranted; all told, the cuts amount to 1.5 percent of global supply and bring the total pledged by the Organization of the Petroleum Exporting Countries (OPEC) to 5.16 million bpd.

A source from the Saudi energy ministry told news agency SPA, "This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets."

Meanwhile, an earlier observation from Jeff Currie, global head of commodities research at Goldman Sachs, that "People are unwilling to embrace the bullish view" proved accurate yet again not only with traders shrugging off news of the extended cuts but also reports that the U.S. enjoyed an all-time high in airline passengers on Friday during the Fourth of July weekend.

Instead, Monday's crude losses were said to be the result of everything from jitters over impending bank interest rate hikes to continued disappointment over China's supposedly tepid economic rebound from the Covid lockdowns.

Still, the Saudi and Russian cuts had the potential to whipsaw some of the market's speculative positioning, a sentiment that came in the wake of CFTC publishing data showing hedge funds and other money managers had the biggest number of outright bearish bets for West Texas Intermediate since 2017.

Paul Horsnell, head of commodities research at Standard Chartered, said the cuts "should help to break the speculative shorts," and with current positioning extremely short "a significant portion of it might be expected to bow out in the face of these producer moves."