Oil drops as economic growth concerns, new OPEC+ supply cuts taking effect this month

On Monday, oil prices dropped due to worries about the economic repercussions of a possible interest rate hike by the U.S. Federal Reserve and declining Chinese manufacturing figures, which overshadowed the positive influence of the latest OPEC+ supply reduction measures beginning this month.

The Federal Reserve is set to convene on May 2-3 and is anticipated to raise interest rates by an additional 25 basis points. Concurrently, the U.S. dollar strengthened in comparison to a range of currencies on Monday, causing oil to become costlier for holders of other currencies.

“The expectation of additional rate hikes to be unveiled by the Fed this week is likely to result in heightened short-term price fluctuations,” stated Baden Moore, the Head of Commodity and Carbon Strategy at National Australia Bank (NAB).

Brent crude declined by $1.64 or 2.0%, settling at $78.69 a barrel at 0947 GMT, while U.S. West Texas Intermediate (WTI) crude experienced a $1.66 or 2.2% drop, trading at $75.12.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, observed, “The inability to establish a firmer position above $80.50 in Brent indicates persistent selling pressure amidst prevalent concerns about growth and demand.”

In recent weeks, concerns about the banking sector have put pressure on oil prices. On Monday, United States regulators announced the seizure of First Republic Bank, the third major U.S. institution to fail within two months, and agreed to sell the bank to JPMorgan.

Attention was also drawn to weak economic data from China, where the manufacturing purchasing managers’ index (PMI) fell to 49.2 in April from 51.9 in March. This drop pushed the PMI below the crucial 50-point threshold, which distinguishes between monthly expansion and contraction in activity.

However, oil prices received some support from voluntary production reductions of approximately 1.16 million barrels per day by members of the Organization of the Petroleum Exporting Countries and allies such as Russia, collectively known as OPEC+. These cuts come into effect in May.

NAB’s Moore stated, “We believe the oil market will experience a deficit throughout the rest of the second quarter” due to the OPEC+ cuts. He further noted that the bank anticipates these reductions, coupled with increased demand, will drive oil prices upward.

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