Crude oil (CL) futures
Fundamental Analysis

Oil Gains 1% on Supply Concerns After Saudi Arabia’s Surprise Output Cuts

  • Saudi Arabia’s significant output cuts propelled oil prices by approximately 1%.
  • Diesel inventories unexpectedly rose by 5.1 million barrels last week.
  • China experienced a faster-than-expected contraction in exports in May.

On Wednesday, oil prices rose by about 1% as Saudi Arabia’s significant output cuts countered concerns about rising US fuel stocks and weak Chinese export data. Dennis Kissler, the senior vice president of trading at BOK Financial, described the oil futures market as a battleground between slowing manufacturing demand, lower diesel consumption, and anticipated production cuts by OPEC and Saudi Arabia.

According to the Energy Information Administration, US crude stocks slightly decreased by around 450,000 barrels. This deviated from estimates of a 1 million barrel build. However, diesel inventories unexpectedly rose by 5.1 million barrels, surpassing the projected build of 1.33 million. 

Additionally, gasoline inventories exceeded expectations, rising by 2.8 million barrels instead of the estimated 880,000 barrels. The unexpected rise in fuel inventories raised concerns regarding the consumption patterns of the world’s leading oil consumer. Concerns increased as the build came despite the growth in travel demand during the Memorial Day weekend.

Chinese exports (Source: China's General Administration of Customs)
Chinese exports (Source: China’s General Administration of Customs)

Earlier in the session, oil prices had declined due to weak economic data from China. The country experienced a faster-than-expected contraction in exports in May and a decline in imports, albeit at a slower pace. Manufacturers struggled to find overseas demand while domestic consumption remained sluggish.

The first quarter saw the world’s second-largest economy surpassing expectations in terms of growth, primarily driven by strong services consumption and a backlog of orders resulting from years of COVID-related disruptions. 

However, factory output has experienced a slowdown due to increasing interest rates and inflation. These have dampened demand in the United States and Europe.

The latest data revealed that China, the world’s largest oil importer, recorded its third-highest monthly crude oil imports in May, indicating refiners were building up their inventories. The Organization for Economic Cooperation and Development forecasted only moderate global economic growth over the next year. It cited the impact of central bank rate hikes.

Furthermore, a JP Morgan note highlighted an increase in forward crude cover in China, suggesting that refiners are storing oil rather than increasing processing rates.

Finally, the weakening of the US dollar, as the chances of a Fed rate hike next week diminished, supported oil prices. A weaker dollar makes oil affordable for foreign buyers, boosting demand.