Oil Traders Favour Saudi Cut Despite Effect on The Kingdom's Economy

But bearish sentiment continues to limit oil's upside: File Image/Pixabay

Oil trading sentiment on Wednesday reversed gears yet again, with Saudi Arabia's recent vow of additional output cuts said to gain favour among investors above concerns of rising inventories and disappointing export data from China.

Dennis Kissler, senior vice president of trading at BOK Financial, said, "Futures seem to be in a 'tug of war' with slowing demand for manufacturing, and lighter diesel demand, against expected production cuts coming from OPEC and Saudi."

Data released Wednesday showed that crude oil imports into China, the world's largest oil importer, rose to their third-highest monthly level in May due to refiners building up inventories; however, China's exports shrank much faster than expected in May.

This middling news was augmented by reports from the Energy Information Administration that crude stocks in the U.S. fell by about 450,000 barrels compared with expectations for a 1 million barrelbuild.

As a result, Brent on Wednesday settled up a modest 66 cents to $76.95 per barrel, while West Texas Intermediate gained 79 cents to $72.53.

Fatih Birol, executive director at the International Energy Agency, told media that "There are many uncertainties, as usual, when it comes to the oil market, and if I have to pick the most important one it's China: of more than 2 million barrels per day [bpd] of growth we expect this year in global oil demand, 60 percent is set to come from China."

Adding to the influx of good news/bad news in the oil sector that cumulatively has severely capped gains and caused traders to lean towards bearish sentiment was a report showing that U.S. refineries had increased their crude processing to the highest since August 2019.

Rob Thummel, a portfolio manager at Tortoise Capital Advisors, took this positively, stating, "Refined product demand is pretty strong, and it's just getting started."

Thummel noted that the report intimates "that you're going to need a lot more U.S. crude and I think that's a positive sign for prices."

In other oil related news on Wednesday, Bloomberg observed that crude prices have risen by only about 1 percent since the Saudis announced their intention to lower output to 9 million bpd, yet the kingdom will need a price of almost $81 per barrel to balance its books this year.

The news agency added that if projects such as the new city of Neom are taken into account, "Saudi Arabia's breakeven oil price rises to $95 a barrel."

Amy McAlister, lead economist for Europe, Middle East and Africa at Oxford Economics, noted that if predictions of moribund oil prices for the remainder of the year hold true, "we expect that additional production cuts will be more prolonged and the impact on the fiscal balance will be more negative" for the kingdom.