By William Watts
May 31, 2023
Synopsis
Oil futures fell due to weak economic data from China, raising concerns about demand from a major crude importer. China's manufacturing purchasing managers index declined in May, falling below expectations for the second consecutive month. This uncertainty in the economic outlook has led to a decrease in demand expectations and a drop in oil prices. The upcoming OPEC+ meeting on June 4 is being closely watched, as there are differing opinions on whether production cuts will be implemented. Overall, the market is wary of future demand and its impact on oil prices.
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| Image: Open AI |
Oil futures slumped early Wednesday after weak economic data out of China underlined worries about demand from one of the world's largest crude importers.
Price action
Market drivers
China's official manufacturing purchasing managers index fell to 48.8 in May, from 49.2 in April, the National Bureau of Statistics said Wednesday. The result was also below the 49.7 expected by economists surveyed by The Wall Street Journal. It marked the second month in a row that the reading fell below the 50 mark, which separates activity expansion from contraction.
"Investors are nervous about future demand, a feeling exacerbated by disappointing Chinese manufacturing data released overnight. With the economic outlook remaining uncertain for the world's largest crude oil importer, demand expectations are falling, causing prices to drop," Ricardo Evangelista, senior analyst at ActivTrades, said in a note.
Oil ended at nearly four-week lows on Tuesday, pressured by worries over economic growth.
A June 4 meeting of OPEC+ -- the Organization of the Petroleum Exporting Countries and its allies, including Russia -- is in focus. Saudi Arabia's energy minister earlier this month warned that short sellers should "watch out," remarks that were viewed by analysts as a warning that a further round of production cuts could be in the offing.
But Russia's deputy prime minister subsequently said he saw no need for additional measures.
"I tend to think that OPEC+ will leave production unchanged unless the Brent curve is trading in contango at the close on Friday," Robert Yawger, executive director of energy futures at Mizuho Securities, said in a note. In contango, later-dated futures trade at a higher price than nearby futures.
"Contango greater than cost of carry, which kicks in at 50 cents to a dollar, is worst case scenario for all producers, and OPEC+ would likely do their best to nip deep contango in the bud before it can grow," he wrote. August Brent was trading at a premium of around 15 cents to July early Wednesday.
-William Watts
Source: www.morningstar.com
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