On Tuesday 25^th July 2023, crude oil prices were able to stabilize near three-month highs. Much of this stabilization was because traders were waiting for the US Federal Reserve meeting after there have been signs regarding the tighter supplies and assurance by Chinese authorities to shore up their economy. Crude benchmarks have seen 4 consecutive weeks of gains, and these were supported by announcements which were made in early July 2023. These announcements were made by Saudi Arabia and Russia, biggest oil exporters, regarding their plans to reduce an additional combined 1.5 million barrels per day from their production levels of July. Apart from this, sentiments were further supported by promises from Beijing to provide significant economic support for Chinese economy. Economy of has been categorised as the world’s second largest and second biggest oil consumer.

Chinese economy is very critical for global oil demand growth this year and the market continues to be concerned regarding the weaker-than-expected economic recovery. As a result, significant support measures should be helpful in providing some relief to such concerns. 

If we talk about inventories, they have been falling by more than 2M barrels for the week ended July 21. There have been expectations that refiners have again turned-out significant volumes in the previous week in expectation of higher demand during the summer driving season.

Despite the rise in crude oil prices, there have been economic data points which limited the gains. For example, in the euro zone area, there was a slowdown in the business activity than the expectations of analysts in July 2023. 

Slowdown in euro zone business prompts recession worries

Business activity in euro zone shrank much more than anticipated by the market in July. This comes as demand in the services industry saw a slowdown, while factory output declined at the fastest pace since COVID outbreak. However, this was decline was broad-based. Two biggest economies of euro zone – Germany and France – were in contractionary territory. This might add to fears that the bloc will go back into recession.

Experts have believed that ECB’s sustained campaign of interest rate increases has been taking a toll on the consumers and has impacted the services sector. 

HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the bloc, which gets compiled by S&P Global and measures overall economic health, fell to 8-month low of 48.9 in July. In June, this was 49.9. Experts suggest that this weakness was widespread throughout the sectors, but the manufacturing sector was the most impacted. Deterioration in macroeconomic conditions is expected to be well underway and it has been spreading from manufacturing to several other sectors. 

Not only the slowdown in the euro zone, but decline in the US business activity has also limited the gains in the crude oil prices. 

Fall in US business activity seen 

Decline in the US business activity to five-month low in July was led by decelerating service-sector growth. Data from S&P Global indicated that its flash U.S. Composite PMI index, tracking manufacturing and service sectors, declined to the reading of 52 in July 2023 from 53.2 in June 2023. Readings of July 2023 showed 6^th straight month of growth. However, this was limited by the softening conditions which were seen in the service sector. Readers should know that readings over 50 indicate expansion. 

As a matter of fact, the US economy was growing as 3Q kicked off, but at the rate slower than April-through-June period. 

Unemployment rate continues to hover around half-century low, but the US economy on average seems to be less hot in 2023. This can be because the effect of pandemic-era stimulus continues to fade and the rise in interest rates has been weighing on credit-intensive activity. Apart from these factors, there has been some moderation in job growth. 

GDP is still heavily dependent on growth in the services industry as manufacturing industry contracts, but experts believed that there has been higher reliance on international demand. This can be said because new export orders for services touched the highest levels since previous year’s May. Increase in foreign demand stemmed from weakening of the US dollar.

Experts Opinion

Experts are Goldman Sachs view that oil prices are expected to see significant increase by year end because record-high oil demand and lesser supply should lead to a large market deficit. Goldman Sachs went on to say that pretty sizable deficits in 2H are expected with deficits of ~2 million barrels per day in 3Q as demand continues to trend upwards. 

With higher demand expected, supply continues to shrink. Production and export cuts from OPEC+ together with decline in the US oil production growth should also result in significant deficits in 3Q of this year.

Russian crude oil exports exhibited some signs of decline for the second consecutive week. Russia continues to prepare to cut 500,000 barrels per day from the oil exports in August 2023. Saudi Arabia’s crude oil exports have declined to below 7 million bpd in May 2023. This has happened for the first time in past several months.

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