Oil markets are currently experiencing mixed signals, with the recent OPEC+ production cuts being seen as both bullish and indicative of weak demand. The surge in oil prices can be attributed to these output reductions and the optimism surrounding the global economy.
While the market is focusing on the positive outcomes of the production cuts, there are bearish factors that are being disregarded. One major concern is the global economic slowdown, which is evident through various indicators. The US non-manufacturing PMI and manufacturing PMI show a decline, suggesting a slowdown in economic activity. Similarly, the Eurozone is also facing an economic decline, with a significant reduction in business output.
China, which was once seen as a possible driving force for the global economy, seems to be struggling to regain momentum after the COVID-19 pandemic. The country’s Purchasing Managers’ Index (PMI) has indicated contraction for the majority of months since its reopening. This indicates that the demand for oil in China, one of the largest consumers, is also on the decline.
Instead of viewing the production cuts as a supply shortage, they should be seen as a reflection of declining demand. The current price rally in the oil market is likely to be temporary, with projections suggesting that oil prices may reach the lower $70s or even the mid $60s.
Furthermore, there is an expectation of a global recession and lower demand by the end of the year. As economies struggle to recover from the impacts of the pandemic, the demand for oil is expected to further decline.
In conclusion, while the market is interpreting the OPEC+ cuts as a positive development, it is important to consider the underlying factors, such as the global economic slowdown and declining demand. The current price rally is likely to be short-lived, with projections of oil prices dropping further in the coming months. The expectation of a global recession and lower demand further underscores the concerns about the oil market’s future.
