Investing.com -- A week after the Saudi bid to surprise the oil market, traders are indeed surprised over how far it is going in opposite to Riyadh’s wishes.
Crude prices tumbled as much as 4% Monday in a takedown that sent U.S. benchmark West Texas Intermediate, or WTI, nearer to its $65 per barrel support, and the global benchmark Brent to almost $70.
The Saudis need Brent to be at $80 at least (which means WTI has to be at $85 or more, given the minimum $5 premium for the global benchmark) and have offered to take 2.5 million barrels off their regular daily production of 11.5M via three cuts announced since October.
Last week, the Saudis offered their latest cut of one million barrels per day. That came after its 12 partners in OPEC, or the Organization of the Petroleum Exporting Countries, and 10 other allies, including Russia, in the OPEC+ alliance decided to stay pat on production.
But the market has rarely been on the same page with the Saudis.
Over the past seven months, Brent briefly crested at nearly $99 before returning towards $70 support on several occasions. WTI’s highest has been almost $94, versus lows of beneath $64 at one point.
Even Wall Street’s biggest bull — Goldman Sachs — cut its forecast for Brent on Monday, announcing a December average of $86 versus a previous $95. For WTI, it called a barrel at $81, down from $89.
Technical charts are showing a bigger drop likely. “Oil bears have been eyeing the 100-month Simple Moving Average of $59.60 for WTI,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
John Kilduff, partner at New York energy hedge fund Again Capital, adds:
“The Saudis are keen to show their ability to positively surprise this market. Instead, what the longs in oil are getting these days are more negative surprises, sometimes those that are right down nasty.”
One of those emerged on Monday when New York-traded WTI crude for July delivery settled down $3.05, or 4.4%, at $67.12 per barrel after a session low at $66.83. Prior to that, the U.S. crude benchmark had lost 3.5% over a two-week stretch.
London-traded Brent officially finished Monday’s New York session at $71.84 per barrel, down $2.95, or almost 4%. Brent lost 2.8% over two prior weeks.
Oil’s latest tumble on Monday came ahead of key inflation data and a Federal Reserve decision that could set the direction for risk-taking across markets.
On Wednesday, the Fed’s policy-making committee is expected to vote for a break from a rate hike campaign that started in March 2022. The Fed pivot is widely anticipated despite an economy that’s still resilient and feeding inflation, contrary to persistent talk of recession.
Just ahead of the central bank’s decision, will be the May reading for the Consumer Price Index on Tuesday.
The so-called CPI hit 40-year highs in June 2022, expanding at an annual rate of 9.1%. Since then, it has slowed, growing at just 4.9% per annum in April, for its slowest expansion since October 2021. The Fed’s favorite price indicator, the Personal Consumption Expenditures, or PCE, Index, meanwhile, grew by 4.4% in April. Both the CPI and PCE are, however, still expanding at more than twice the Fed’s 2% per annum target for inflation.
Bloomberg provided just before the weekend a snapshot of analysts' thoughts to show how divided markets — and the Fed itself — were on a stay in rates:
“Those who prefer to skip a hike in June want to wait and see — given the long and variable lags of monetary policy — how 500 basis points of rate hikes to date are cooling the economy. More hawkish members are convinced rates aren’t yet restrictive enough, and the Fed shouldn’t risk falling behind the curve. We see a ‘hawkish skip’ as a way to maintain unanimity on the committee.”
Oil bulls also have a new problem — or rather, an old problem threatening to become new: an offer by Iran’s supreme leader to reopen negotiations with the West for a nuclear deal that could put some sanctioned Iranian crude back on a market already worried about demand.
Ayatollah Ali Khamenei said that a deal was possible if Iran’s nuclear infrastructure was kept intact. His comments came just a few days after both Tehran and Washington denied reports that an interim nuclear deal was close. They reignited fears of a nuclear deal, given that it could flood the market with supply if sanctions on Iranian crude are lifted.