Oil dips; Saudi cuts mania at cross-roads with slowing U.S. road travel

Investing.com -- It’s the Saudi playbook: Cut production when demand is bad and punish your best customers (Asians) who are beholden to you. 

Despite doubling down on these, OPEC’s front-runner couldn’t put too much octane into the oil rally Monday, with crude prices feeling heavy after a six-week run-up. 

New York-traded West Texas Intermediate, or WTI, crude settled down 88 cents, or 1.1%, at $81.94 per barrel. The U.S. crude benchmark gained almost 20% over the past month-and-a-half, reaching $83.23 last week for its highest since April. 

London-based Brent crude settled the U.S. trading session down 90 cents, or 1.04%, on Monday at $85.34. Like WTI, Brent also hit three-month highs last week, reaching $86.64, and gaining about 17% over the past six weeks.

Monday’s price slide came after the Saudis announced last week that their daily production cut of one million barrels per day, enforced in July and August, would be extended to September.  

Russia chirped in on the Saudi announcement, saying it would shed 300,000 barrels per day from its own exports. 

Topping those measures, was a hike on Monday by the Saudis in the selling price of their crude to Asia and some European destinations.

“Also dragging oil prices down is the rising expectations that the U.S. will see a recession by the end of 2024,” Ed Moya, analyst at online trading platform OANDA, added, citing a Bloomberg investor poll that showed two-thirds of 410 respondents expecting a recession by end-2024, and 20% seeing one by end-2023. 

OPEC's history is poor on winning when demand is down 

To hear it from both ends of the market, one constituency (the bears) sees demand weakening with the approach of the Sept 4th Labor Day, where summer travel will officially wind down, meaning less pump sales of gasoline thereafter.

The other side, (the bulls), are staying on the messaging that Saudi production cuts will tighten the market — and, hopefully, balance out any lack of buying.

“You can’t cut your way to prosperity in the absence of demand, and we’ll see how successful the Saudis can be with that,” said John Kilduff, partner at New York energy hedge fund Again Capital. “I know OPEC has poor history on that.”

Adding to the weight on oil Monday was the dollar’s run-up for a fourth time in six sessions as traders reacted to the odds of the Federal Reserve raising rates again in September, especially if key inflation data this week comes in higher than desired.

Dollar weight also working against oil bulls

The United States is to release on Thursday its July reading for the key  Consumer Price Index, or CPI, which will show how much further the Fed has to go with rate hikes.

The CPI, which rose by 3.0% year-on-year in June for its smallest growth in two years, is expected to have seen a slightly more aggressive expansion of 3.3% in July. The Fed’s target is just 2% per annum.

The Fed has identified runaway jobs growth and correspondingly higher wages — as well as trillions of dollars of relief spending over the 2020 coronavirus outbreak — as among reasons for inflation hitting 40-year highs of more than 9% a year in June 2022. While the pandemic spending is over, jobs and wage growth have continued to fuel inflation, prompting the Fed to keep adding to interest rates.

Since March 2022, the central bank has hiked rates by 525 basis points from a previous 25. Its next rate decision is on September 20. 

Rates, already at a 22-year high, need to rise further as inflation remains above tolerable levels for the average American, Fed Governor Michelle Bowman said Monday.

“We have made progress in lowering inflation over the past year, but inflation is still significantly above the FOMC's two percent target, and the labor market continues to be tight, with job openings still far exceeding the number of available workers,” Bowman said in a speech, referring to the policy-making Federal Open Market Committee of the central bank. “I expect that additional increases will likely be needed to lower inflation to the FOMC's goal.”