Oil futures: Brent tops $76/b, output cuts outweigh weak data

Quantum Commodity Intelligence – Crude oil futures Tuesday were climbing higher as investors weighed up the impact of the latest output cuts announced by Saudi Arabia and Russia against a backdrop of weak economic data.

Sep23 ICE Brent futures were trading at $76.25/b (1730 GMT), compared to Monday's settle of $74.65/b.

At the same time Aug23 NYMEX WTI was trading $71.21/b amid thin holiday volumes, versus Monday's close of $69.79/b.

Saudi Arabia announced Monday it would extend its voluntary crude oil production cut of 1 million bpd into next month, while Russia said it was reducing exports by 500,000 bpd for August.

However, the initial uplift proved short-lived as prices eventually settled little changed on Monday, before recovering Tuesday.

"This leaves the Saudis in a difficult spot for the next few months, as they will have to be careful how they wind down this supply cut in the current environment," said Warren Patterson, head of ING's commodity research.

"Although the Russian announcement was a surprise, there will be doubts within the market over whether Russia will actually make the cuts or not," added ING.

"Russia's track record this year has not been great. Russia supposedly cut supply by 500,000 bpd earlier in the year. Yet seaborne crude oil exports from Russia have been above pre-war levels for much of this year."

Manufacturing

The output cuts were as superseded by weak US factory activity, which contracted for the eighth consecutive month in June, while Eurozone manufacturing also declined. 

A survey from the Institute for Supply Management (ISM) again showed US activity is shrinking and leaving factories resorting to layoffs at "a greater extent than in prior months".

"The June ISM manufacturing report was a dud and continues to signal the sector is broadly in contraction. All of the components were below 50, and the only positive takeaway in this release is that new orders contracted at a slower rate in June," said Wells Fargo in a research note. 

Purchasing Managers Index numbers from Europe have also been generally shaky, with Germany's manufacturing release the most concerning. The headline figure has been below the key 50 level separating expansion from contraction since July last year, limping in at 40.6 for June.

"European manufacturing PMIs also exhibited similar weakness in their respective components, with varying degrees of contraction, however there was a common theme running through them, which was declining output, as well as falls in new orders," said Michael Hewson, chief market analyst at CMC.