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05.06.2023 10:36 PM
Oil prices rise amid expectations of production cuts

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Oil prices continued rising on Monday following the results of the OPEC+ meeting.

In afternoon trades, Brent oil futures for August were up by 2.18%, hitting $77.79 per barrel. At the same time, the price of WTI oil futures for July had risen by 2.34% to reach $73.42 per barrel.

Market participants are assessing news on oil production volumes, defined by OPEC+ countries at their most recent meeting in Vienna. As decided at the meeting, the oil output will be reduced by 2 million barrels per day by the end of this year, amounting to 41,856 barrels daily.

Next year, production will be further cut by an additional 1.393 million barrels, reaching 40,463. Saudi Arabia and Russia plan to maintain their production cut at 500,000 barrels per day. Moreover, the Saudi announced plans to significantly reduce its oil production in July by 1 million barrels.

This decision by OPEC+ likely reflects the alliance's doubts about global economic growth over the next two years. This means that the cartel does not anticipate substantial demand for energy in the near future.

Recent economic growth data from leading countries around the world has been downbeat. For instance, GDP growth in the first quarter of 2023 was barely noticeable in European Union countries and the UK, with a mere 0.1% increase. Germany even fell into a recession. The US and Canada also showed insignificant GDP growth, only 1.3% and 0.8% respectively.

All hopes were pinned on China, as it is the world's largest importer of energy. But its performance also fell short of expectations, with a GDP growth of only 2.2% in the first quarter.

With such data from major economies, hopes for a stable demand for crude oil are fading.

In fact, even American oil companies do not believe that there will be a high demand for oil in the near future. The number of active drilling rigs in the US has dropped by 11.5% since the beginning of this year, indicating that even in the US, extraction volumes will be significantly lower.

In addition, the market anticipates that the US financial regulator has finally ended its run of rising interest rates. These expectations arose after the release of employment data showing that unemployment in the US increased to 3.7% in May (from 3.4% in April). These figures are extremely important for the US Federal Reserve, as they directly influence its interest rate decision.

According to the CME Group, the vast majority of analysts today (79.5%) are confident that the Fed will maintain the current interest rate level of 5-5.25% at its next meeting on June 13-14. The rest of the experts lean towards the regulator raising the rate by another 25 basis points. Regardless, much will depend on the inflation data: if it is not alarming, then all future rate hikes will be insignificant.

Andreeva Natalya,
Analytical expert of InstaForex
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