Oil falls as economic fears overshadow Saudi output cut

LONDON: Oil prices tumbled by more than $1 a barrel on Tuesday, retreating from a strong rally in the previous session as worries over global economic growth outweighed Saudi Arabia’s pledge to deepen output cuts.

Brent crude futures were down $1.30, or 1.69%, at $75.41 a barrel by 1327 GMT. U.S. West Texas Intermediate crude fell $1.39, or 1.93%, to $70.76.

Brent gained as much as $2.60 a barrel on Monday and WTI as much as $3.30 after Saudi Arabia, the world’s top exporter, said at the weekend that its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July.

But weaker demand, stronger non-OPEC supply, slower economic growth in China and potential recessions in the U.S. and Europe mean the Saudi cut is unlikely to achieve a “sustainable price increase” into the high $80s and low $90s, Citi analysts said in a note on Tuesday.

Backwardation in Brent crude oil futures — where the current value is higher than in later months — steepened after the weekend announcement, with the six-month spread hitting a five-week high of $2.20 a barrel on Monday.

It fell to about $2.06 a barrel on Tuesday.

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“The market remains focused on the risk to demand, with recession concerns mounted on a broad-based miss in U.S. services PMI, giving room for a Fed pause on rates,” said Ole Hansen, head of commodity strategy at Saxo Bank.

The U.S. services sector barely grew in May as new orders slowed and market participants waited to see if the U.S. Federal Reserve will raise or hold interest rates in June.

Higher interest rates could curb energy demand.

The mood was further dented by data showing that German industrial orders fell unexpectedly in April.

“If upcoming economic data suggests entrenched inflationary pressure and investors bet on further hikes in interest rates, demand predictions could be revised downwards, effectively neutralising the ostensibly bullish impact of the latest (OPEC+) output decision,” said Tamas Varga at brokerage PVM.

The U.S. Energy Information Administration (EIA) is due to release its short-term energy outlook on Tuesday afternoon before China’s May trade data on Wednesday provides fresh demand indications for the world’s second-largest oil consumer.