Oil rises as market weighs supply cuts against economic outlook

The oil prices surged by 2% on Tuesday as the market weighed supply cuts by Saudi Arabia and Russia — the world's biggest oil exporters —against a weak global economic outlook.

A day earlier, the two countries extended supply cuts, sending the prices of the commodity higher despite concerns over a global economic slowdown and possible further interest rate increases from the US Federal Reserve.

Riyadh said it would extend its voluntary output cut of 1 million barrels per day (bpd) to August while Russia and Algeria volunteered to lower their August output and export levels by 500,000 bpd and 20,000 bpd, respectively, Reuters reported. 

If fully implemented, that would bring a combined reduction of 5.36 million bpd from August 2022 — possibly even more because several countries in the OPEC+ producer group are unable to fulfil their output quotas, said PVM analyst Tamas Varga.

The total cuts now stand at more than 5 million bpd, or 5% of global oil output.

As per the latest data, Brent crude futures settled up $1.60 at $76.25 a barrel. US West Texas Intermediate crude was trading $1.44 higher at $71.23 today.

"Clearly, the Saudis are taking proactive and pre-emptive steps to stabilize the price of crude oil as well as see gains to reach $80 a barrel to sustain their domestic budgets," said Andrew Lipow, president of Houston-based Lipow Oil Associates.

Even so, the market will wait to verify Russia's announced cuts, and concerns continue that high-interest rates will weigh on global demand, Lipow said.

Oil benchmarks settled about 1% down in the previous session, as a gloomy macroeconomic outlook served to erase early gains.

US markets were closed on Tuesday for the Independence Day holiday.

Little has changed in oil dynamics despite Monday's announcements, said OANDA analyst Craig Erlam. "Only a significant break above $77 will suggest something has changed, otherwise range-bound trade could well continue."

Business surveys have shown a slump in global factory activity because of sluggish demand in China and Europe, and US manufacturing also fell further in June to levels last registered in the first wave of the COVID-19 pandemic.

This broader uncertainty is likely to overshadow OPEC+ efforts to tighten supply, some analysts said.

Even before the latest cut announcements, International Energy Agency (IEA) data suggested the oil market was set to show a supply deficit of roughly 2 million bpd in the third and fourth quarters, Commerzbank analysts said.

Oil prices did not jump significantly on the news, largely because of demand concerns over China's sluggish economic recovery after the lifting of pandemic restrictions. Meanwhile, interest rates in the US and Europe are expected to rise further to address persistently high inflation, the analysts said.