Oil Hits 4-Month Low on OPEC+, API

Crude oil (CL) fell on Tuesday, June 4, extending Monday's declines and erasing most of this year's gains. Brent crude oil (EB) prices fell by $0.82 to $77.54 per barrel (at 4:01 pm ET), while WTI crude dropped by 1.24% to $73.30, both losing around $6 per barrel from the week prior.

The drop follows OPEC+ announcing plans over the past weekend to increase production from October onwards, despite extending cuts, and the American Petroleum Institute (API) reporting a surprise inventory build for the week that ended May 24. 

Pressure on prices could also be tied to worries about economic growth and the Strategic Petroleum Reserve (SPR) inventories in the US.

Factors Driving Oil Prices Lower

Oil prices fell to near four-month lows on Tuesday, June 4,  following a trove of news and data reflecting concerns over excess oil supply while demand growth shows signs of slowing. Let’s take a closer look:

OPEC+ Signals Gradual Production Unwind

Despite extending cuts into 2025, OPEC+ also agreed over the weekend to begin unwinding some of the cuts from October onwards, which may lead to a supply surplus. In this surprise move, eight oil-producing countries led by Saudi Arabia and Russia revealed a plan to gradually phase out 2.2 million barrels per day through September 2025. This may see over 500,000 barrels per day returning to the market by December, weighing on prices on Monday. (Source: CNBC)

SPR Purchases Near 2024 Target

At the start of the week, the Department of Energy (DOE) also announced the purchase of another 3 million barrels of oil for the SPR at $77.69 per barrel as part of efforts to replenish 180 million barrels released in 2022 in the aftermath of Russia's invasion of Ukraine. However, the administration has so far bought back 38.6 million barrels. The DOE had announced back in March that it expected SPR levels to end the year at approximately 40 million barrels, leaving a tiny margin to buy until the end of 2024.

Manufacturing Slowdown Signals Caution

Also Monday, the ISM Manufacturing PMI showed that the index fell to a three-month low in May at 48.7%, well below forecasts of 49.6%. This may have fueled worries that the US economy may be slowing enough to warrant rate cuts from the Fed in the coming months, with Fed funds futures now pricing in higher chances of rate cuts by the end of the year. Job openings on Tuesday added to these concerns as they dropped to 8.1 million in April, missing economist expectations hours ahead of the API report.

API Reveals an Unexpected Build

Tuesday's API report showed crude oil inventories rose by 4.052 million barrels, compared to forecasts of a 1.9 million draw. Gasoline (RB) inventories increased by 4.026 million barrels, distillate inventories by 1.975 million barrels, and Cushing inventories by 983,000 barrels. Both Brent and WTI prices slid following the lacklustre report.

What Do Analysts Think?

Following the weekend announcement, Goldman Sachs (GS) viewed the OPEC+ decision negatively as it showed the cartel's desire to raise production even if demand softened. TD Securities said the easing of supply risk premia was already weighing on oil prices, and the news had done little to change that. 

Nonetheless, RBC Capital Markets analyst Helima Croft said OPEC was clear that the unwinding would be data-dependent. As a matter of fact, Saudi Minister of Energy Prince Abdulaziz bin Salman said OPEC+ would pause or reverse the increase if demand was not strong enough. 

Moreover, Tamas Varga, an analyst at the leading broker of oil instruments PVM, said that the downside may be limited so long as summer gasoline demand doesn't disappoint and the recent sell-off helps ease global inflationary pressure.

To gauge short-term sentiment on US demand, analysts may focus on the upcoming Energy Information Administration (EIA) inventory data release data on Wednesday as it will show just how much gasoline was consumed over the recent Memorial Day weekend.

Lastly, for the longer term, analysts polled by Reuters before the weekend decision showed crude oil averaging at $80.46 per barrel, higher than $78.09 per barrel in March.

Conclusion

With the API reporting a surprise build in inventories and signs of a potential slowdown in the US both after the OPEC+ weekend announcement, caution may be the watchword. 

Although the upcoming EIA data will be a critical piece of confirmation, investors may want to weigh in on all developments, from Fed to analysts' targets, carefully and balance short-term reactions with longer-term outlooks.