What’s happening with oil?

“It’s here: The July oil bulls have been waiting for. In July the Saudi oil minister plans to make a difference with, via an additional million barrels per day in output cuts. July where some of the most optimistic forecasters for crude think it could set highs of $90 or more for a barrel of Brent.

Kicking off the bullish messaging of the Saudis and other oil producers will be the July 5-6 seminar of oil industry CEOs with energy ministers from OPEC – the Organization of the Petroleum Exporting Countries. OPEC and its allies, known as OPEC+, which include Saudi Arabia and Russia. The 23-nation alliance pumps more than 40% of the world’s oil supply.

Determined to control the narrative of this meeting, OPEC is again barring Bloomberg, Reuters and the Wall Street Journal from covering the event, similar to what it did at the last OPEC+ ministerial meeting in June.

“The focus will be on the OPEC seminar, which will likely contain an update on what the Saudis are thinking,” said Ed Moya, analyst at online trading platform OANDA. “Saudi Aramco will also set prices for August, which will let us know how bad the demand situation has become or if they are going to get closer to competing with Russian prices.”

The bull thesis for oil in the second half is held up by expectations that major producer Saudi Arabia will cut production meaningfully to bring Brent to above $80 a barrel and U.S. West Texas Intermediate to at least $75.

New York-traded WTI, ended the second quarter down almost 7% and the half-year 14% lower at $70.64 a barrel. London-traded Brent finished the quarter off by about 6% and the first-half almost 13% down at $74.90.

The Saudis, who lead OPEC+, have announced three production cuts since October that would theoretically remove 2.5 million barrels per day from their production, bringing their output to just around 9 million daily barrels in July.

But crude prices have only rallied briefly after each of those announcements as rate hikes by the Fed and other central banks have become a bigger factor for the oil market which fears a worldwide economic slowdown that could impact energy demand.

“The first half of the oil story shows disappointed oil bulls with concerns about rising interest rates, Federal Reserve officials promising a slowdown in the economy, bank failures, perceived weakness in Chinese oil demand and the inability to rein in sanctioned oil from Russia and Iran,” said Phil Flynn, energy analyst at the Price Futures Group in Chicago.

China will start releasing an estimated 10 million barrels of oil imported from Iran and Venezuela and waiting at ports for weeks amid increased cargo scrutiny, Reuters reported on Wednesday, citing trading sources with knowledge of the matter.

Flynn, an ardent oil bull, however, thinks the second half could be a story “radically different” for crude and positive for those long the market as the current supply surplus “may turn into a deep deficit”.

A panel discussion on Wednesday hosted by the European Central Bank and including the heads of the Federal Reserve, Bank of England and Bank of Japan, showed nearly all on board with higher interest rates to curb higher-than-expected inflation.

Fed Chair Powell followed that up on Thursday by telling a banking event in Madrid that the U.S. central bank was trying to find the level for rates that will restrain economic activity and inflation without causing unnecessary weakness.

Also awaiting July has been the Fed, which is closely watching everything associated with the economy – from the labor market to energy-induced inflation, among others – to decide on interest rates at its July 26 meeting.

Laying the path for the Fed are two disparate U.S. data points: First quarter GDP and the Personal Consumption Expenditures Index, which could pull the central bank either way on whether to hike rates over the next 3-½ weeks or maintain the pause on monetary tightening that it decided on June 14.
U.S. GDP grew by an annualized 2% in the first quarter of this year, the Commerce Department said Thursday in a revelation likely to add to the Fed’s relief that its rate hikes of the past year had not weighed too much on growth.

Economists polled by US media had forecast a year-on-year growth of only 1.4% on the average for the January-March period. The Commerce Department’s prior growth estimate for the quarter was just 1.3%.

The Fed has been seeking a “soft landing” of the economy, something that translates to slower but not negative GDP growth. The latest quarterly result indicates that the central bank might just get its wish.

Offsetting some of the hawkish Fed mood was the latest PCE Index report released Friday. The PCE, an indicator closely followed by the Fed, grew 3.8% in the year to May — below the key 4% level for the first time in more than two years.

The Fed’s tolerance for inflation is a mere 2% per annum. The central bank has raised interest rates by 5% since the end of the coronavirus outbreak in March 2022, bringing them to a peak of 5.25% in an attempt to bring inflation back to its targeted level.

“[The] big picture [is] inflation is slowing, but it’s still too high for the Fed,” MarketWatch said in a commentary published soon after the PCE report was put out by the Commerce Department. “Senior Fed officials worry that rising labor costs and price increases in major parts of the economy such as housing could keep inflation at elevated levels for a few more years.”

Thus, expectations are that the Fed will boost lending rates by another quarter percentage point on July 26 that will bring them to a peak of 5.5%.”