What’s moving oil prices, and could crude drop to as low as $60 (£47.10) a barrel? Oil prices have started the week relatively flat but there was more downward pressure on Tuesday after China’s decision to cut benchmark lending rates fell short of expectations, adding to concerns about demand for black gold in the world’s largest importer.
China’s central bank (The People's Bank of China) cut its one-year and five-year loan prime rates by 10 basis points each for the first time since August 2022 to provide support for its stumbling economy.
Citi and Goldman Sachs cut their economic forecasts for the country in light of the macroeconomic headwinds, following similar downgrades from JP Morgan, UBS, and Bank of America.
The recent extension of crude supply cuts to the market by top oil producing group OPEC+, in addition to the cuts from Saudi Arabia, showed oil prices some support. However, the global economic outlook remains a significant downside risk for oil.
As a result, economist and global oil analyst at Primary Vision Network, Osama Rizvi, told Yahoo Finance he is bearish on oil prices and believes crude prices could drop to $60 a barrel.
Here’s what he said investors should be watching that could cause the prices of crude to shift.
On 4 June, the OPEC+ group agreed to extend crude output cuts until the end of 2024. The cartel currently has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand.
The same day, Saudi Arabia announced a voluntary production cut of 1 million barrels per day (bpd) from July, which will take its production to the lowest level in several years.
As a result, the general view among many analysts was that the cuts may lift oil prices, although other factors, such as Chinese demand, were likely to overshadow the cartel’s efforts to boost prices.
“I think the oil prices are going to go down, they are heading lower because of the following reasons. First of all, the OPEC+ cuts reflect a tactical admission by OPEC and Saudi Arabia, a concession that they do not see oil demand rising in the future,” Rizvi said.
The analyst said this can be corroborated by another factor, which is growing recession fears, which comes after Europe entered a recession, as well as New Zealand and Germany.
“A few weeks ago, all the economic indicators in the US were also down. You look at the ICM manufacturing non-manufacturing indices, you look at the electricity supplied and used by the industry, you look at other profits. So all of them suggest that recessionary factors are piling up,” Rizvi said.
Economist Nouriel Roubini, also known as 'Dr Doom', doubled down on dire warnings about the US, saying the country is heading for a recession due to a combination of higher interest rates, sticky inflation, and a credit squeeze.
"I would say the probability of a hard landing – meaning at least two consecutive quarters of negative economic growth – are higher than the one of a pure soft landing, the NYU professor said in a Yahoo Finance interview.
"The economy is slowing down, the Fed has raised rates, and in my view, they'll have to raise them more because inflation is still too high. Both wage inflation and core," Roubini said.
This, Rizvi said, can be added to another factor, which is lower Chinese demand.
“China's reopening was expected to be one of the key events driving the demand for global oil specifically. However, what happened is that China's economic data continues to disappoint. Their PMI indices are below 50. That shows contraction. The precipitation rates in China are falling owing to climate change. Therefore, China is facing a lot of issues,” Rizvi said.
He also noted that China’s credit impulse is down, an economic indicator for investors which measures the change in new credit or bank lending as a percentage of the gross domestic product.
“Credit impulse is actually down across the major three economies in the world. So these indicators show that global oil demand might not be as much because the global economy isn't very strong at the moment,” he added.
Lastly, the oil analyst noted the Iran deal, which is yet to be revived as negotiations continue.
“Iranian oil is back in the markets [despite US sanctions]. It's about 1.6bn barrels of exports, the highest level since 2018, when it was 2.5m barrels. They are producing 3m barrels per day. And according to some people, more than 3m barrels per day. But what is happening is that the supply is overwhelming demand. So demand is not there but supply is there, and Venezuelan oil is also there,” Rizvi highlighted.
He also noted how Russian oil has been resilient so far.
“It has not gone down. So I think all of these factors make a good case for the downward pressure on oil prices. And I think that oil prices might head into the lower sixties [$60 p/b] before the end of the year,” he concluded.
Remember, past performance is not a guarantee of future results.
Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money.
Moreover, never trade more than you can afford to lose.
Watch: Could oil fall below $60? Here’s what’s moving crude prices