Oil ends lower as OPEC+ output cut phaseout feeds prospects for a supply surplus

Myra P. Saefong and William Watts

WTI, Brent crude fall for a fifth straight session

Oil futures tallied a fifth straight session loss on Tuesday as OPEC+'s decision over the weekend to begin unwinding some production cuts later this year fed concerns about the prospects for a supply surplus.

Worries about the U.S. economic outlook after weak data Monday also contributed to concerns about the demand outlook, analysts said.

Price moves

West Texas Intermediate crude CL00 for July delivery CL.1 CLN24 fell 97 cents, or 1.3%, to settle at $73.25 a barrel on the New York Mercantile Exchange.August Brent crude BRN00 BRNQ24, the global benchmark, dropped 84 cents, or 1.1%, to end at $77.52 a barrel on ICE Futures Europe. Brent and WTI oil ended lower for a fifth straight session Tuesday, with both settling at their lowest since early February.July gasoline RBN24 edged up by 0.6% to $2.35 a gallon, while July heating oil HON24 shed nearly 0.5% to 2.29 a gallon.Natural gas for July delivery NGN24 settled at $2.59 per million British thermal units, down 6.2% after gaining 6.5% on Monday.

Market drivers

The Organization of the Petroleum Exporting Countries and its Russia-led allies agreed to an extension of low production quotas on Sunday, but "markets are paying more attention to the short-term supply-demand balance and viewed the [group's] move as underwhelming," said Alex Kuptsikevich, FxPro senior market analyst.

WTI and Brent crude on Tuesday marked fresh settlements at their lowest since early February. Prices had also settled at four-month lows Monday as investors reacted to the OPEC+ decision to begin slowly phasing out a suite of voluntary production cuts from eight members totaling 2.2 million barrels a day over a 12-month period beginning in October.

OPEC+ on Sunday also agreed to extend through the end of 2025 group cuts of around 3.66 mbd that were due to expire at the end of this year.

Read: Why U.S. oil production isn't a huge threat to OPEC+ market share anymore

"The price weakness on the oil market suggests that market participants doubt that OPEC+ will be able to gradually reduce its voluntary production cuts without risking oversupply," Carsten Fritsch, commodity analyst at Commerzbank, said in a note.

"Although this isn't the case for the autumn, it does apply to the coming year in view of the implicit market balance. OPEC+ is apparently counting on a significant revival in oil demand," he said.

However, a weak reading from the Institute for Supply Management's U.S. manufacturing index on Monday served to raise worries over the outlook for the world's largest economy. The index fell to a three-month low of 48.7% in May from 49.2% in the prior month. Numbers below 50% signal that the manufacturing sector is contracting.

Read: Why oil's recent drop is not a recession signal - and good news for stocks

"General pessimism" about the health of the global economy may be adding to this downward sentiment in oil, Derek Holt, vice president and head of capital markets economics at Scotiabank Economics, wrote in a Tuesday note.

"At this rate, give that another day and another couple of [economic] indicators and the markets might be jubilant again," he said.

-Myra P. Saefong -William Watts

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06-04-24 1525ET

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