What Do the Latest Oil Cuts by Russia, Saudi Arabia Say About Future Demand?
Riyadh and Moscow are both concerned about the trajectory of oil prices, and the macroeconomic outlook is supporting their premonitions.
Crude oil prices briefly popped higher after news broke that starting in August, Russia will be cutting its oil exports by half a million barrels per day. This would reduce their total production to just above 9 mb/d.
The announcement by Russian Deputy Prime Minister Alexander Novak came shortly after the de facto leader of OPEC, Saudi Arabia, announced an extension of oil production cuts by 1 mb/d through August.
Both oil-exporting behemoths will only be producing around 9 mb/d. According to Bloomberg, these cuts collectively could reduce 1.5 percent of global oil supplies. Brent initially spiked on the news, but then solemnly fell.
Why?
In short: if demand continues to weaken, prices will continue to fall if supply cuts are smaller than the corresponding reduction in demand.
Year-to-date, oil prices are down just under 10 percent and have been stubbornly low, with the latest closing at $72.42 per barrel. Since the double-digit spike at the start of the invasion of Ukraine, crude oil prices are down over 40 percent.
The decline in crude oil prices globally is the result of monetary authorities all rapidly raising interest rates.
As central banks all over the world continue to hike interest rates to stem the wildfire of inflation, economic dynamism is wilting. Some countries - like the UK - have stagflationary-esque characteristics: low growth and high inflation.
The worst of both worlds.
As a result, demand for crude oil is falling at a commensurate rate to the deepening pessimism about the macroeconomic outlook. The most consequential central bank to raise rates is the Fed, which has hiked rates 10 times since March 2022.
As the monetary steward of the world’s reserve currency, raising the cost of borrowing the US Dollar has far more, multi-iterated consequences - e.g. global borrowing costs - across the world economy than any of its G10 peers.
That alone would be a formidable risk, but central banks all over the world are contributing to tightening credit conditions globally. The cumulative effect is dampening growth and demand for key production inputs - like crude oil.
Looking ahead, US jobs data later this week may rattle markets and economists further if strong labor growth reinforces the Fed’s impetus to continue its credit-tightening crusade to tame inflation.
Stay tuned for a pre and post-analysis of US jobs data this week.