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How are cuts and demand concerns affecting oil?

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Nhim Kosol, PPLS Deputy General Manager

How are cuts and demand concerns affecting oil?

Crude oil prices, currently in a range-bound market, have been moving in a supply and demand zone of $67 and $74 per barrel, trading at $71.64 over July 3-4.

Technically, crude oil prices have been in an indecisive range, moving back and forth over the flatted line of a 200-day moving average of $70 per barrel in an hourly timeframe for almost 12 weeks.

Fundamentally, there are a number of factors behind the sideways movement in the price of crude.

And while the market awaits confirmed figures regarding voluntary output cuts from Saudi Arabia, Russia and Algeria – with expectations of a resulting short-lived bullish trend – there are strong factors supporting a bearish sentiment for crude in the long term.

“Saudi Arabia on Monday said it would extend its voluntary output cut of one million barrels per day (bpd) to August, while Russia and Algeria volunteered to lower their August output and export levels by 500,000 bpd and 20,000 bpd, respectively,” Reuters reported on July 5.

To combat inflation caused by the cuts by Saudi Arabia, Russia and Algeria, the US has increased its output.

Another concern regarding demand for oil stems from fears China’s economic recovery after lifting its Covid restrictions is faltering.

“China’s manufacturing activity contracted for a third straight month in June, albeit at a slower pace, an official factory survey showed on Friday, as pressure builds for policy-makers to release more stimulus to shore up weak demand,” Reuters reported late last week.

Further expected interest rate hikes from the US Federal Reserve and the European Central Bank could also be considered as portents for a coming drop in consumer demand for oil.

“Adding to [demand] worries, leading central banks, including the US Federal Reserve, are warning more interest rates hikes could be on the horizon to fight stubbornly high inflation.

“Higher interest rates eat into consumers’ disposable income and could translate into less spending on driving and travelling, limiting oil demand,” Reuters said on July 4.

Therefore, for this week’s trading recommendation, the predicted price range of crude in July could be between $65.50-$71.50 per barrel.

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