Crude oil was heading for the second week of losses in a row despite the additional production cut Saudi Arabia announced at last Sunday’s OPEC+ meeting.

In morning trade in Asia today, Brent crude was changing hands for less than $76 per barrel and West Texas Intermediate was trading at below $71. Both were down from close on Thursday.

Oil markets have become highly volatile in the current week as traders try to make sense of a mix of both bullish and bearish drivers. Oil prices rallied mid-week after the latest EIA report showed crude refining has hit the highest level since August 2019 in anticipation of strong summer demand. However, the same report revealed that U.S. crude production has hit the highest levels since April 2020 while crude exports have declined.

Crude oil inventories at the WTI pricing hub at Cushing, Oklahoma, rose for the seventh consecutive week and are currently close to the five-year average. The w/w crude oil balance shows unusually large swings in exports and imports.

But the most bearish piece of news came outside the U.S. market with reports that Iran might soon officially resume oil exports.

U.S. crude fell nearly 5% on Thursday to briefly trade below $70/bbl after reports emerged that the U.S. and Iran are making progress after resuming talks on a nuclear deal, a move that could ease sanctions on Iran’s oil exports.

Oil prices declined on over the weekend ahead of a U.S. Federal Reserve meeting as investors tried to gauge the central bank’s appetite for further rate hikes, while concerns about China’s fuel demand growth and rising Russian crude supply weighed on the market.

Looking Ahead

Saudi Arabia, the world’s top oil exporter, vowed to reduce its production to 9 million barrels per day (bpd) in July from around 10 million bpd currently.

Some Chinese state-owned refiners have requested lower supply in July, according to three trading sources, estimating the combined volume could be about 10 million barrels less than they took for June.

Saudi Aramco unexpectedly raised its official selling prices for all crude grades to Asia for July-loading cargoes, which would hurt refining profits and could spur refiners to buy more feedstock from the spot market.

However, China’s total July intake of Saudi crude is likely to stay around the same level as June, as other Chinese refiners have asked for more supply for July from a low base in June.

U.S. Defense Department officials have been busy spreading the message that in the event of an intensified conflict with China, CENTCOM could cut off China’s oil imports by blocking oil shipments through the Strait of Hormuz, most notably, along with some other chokepoints.

The argument being circulated by certain DoD officials is this: Because some 98% of China’s energy imports from the Middle East traverse the Strait of Hormuz, cutting off this chokepoint would do severe damage to Beijing, and CENTCOM is positioned to step in.

Brent crude futures fell 70 cents, or 0.94%, to $74.09 a barrel by 0647 GMT. U.S. West Texas Intermediate (WTI) crude was at $69.53, down 0.91%.
Both benchmarks posted their second straight weekly declines last week as disappointing China economic data raised concerns about demand growth in the world’s largest crude importer, offsetting a boost in prices from Saudi Arabia pledging to cut production by 1 million barrels per day (bpd) in July.