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Oil rally cools as markets weigh OPEC+ cut, manufacturing slowdown

Published 04/03/2023, 08:51 PM
Updated 04/03/2023, 08:57 PM
© Reuters.

By Ambar Warrick -- Oil prices rose slightly in early Asian trade on Tuesday as markets weighed a surprise output cut by the OPEC+ against fears of slowing economic growth after a barrage of weak manufacturing indicators from across the globe.

Crude prices rallied to multi-month highs on Monday after the Organization of Petroleum Exporting Countries and allies (OPEC+) unexpectedly said it will cut output by over 1.6 million barrels per day (bpd), pointing to tighter supply in the coming months.

But this was also accompanied by a slew of weak manufacturing data from across the globe, which played into concerns that an economic slowdown could dent crude demand this year.

Brent oil futures rose 0.2% to $85.03 a barrel, while West Texas Intermediate crude futures rose 0.2% to $80.58 a barrel by 20:51 ET (00:51 GMT).

Both contracts surged over 6% on Monday, with Brent now forecast to end the year above $100 amid tighter markets.

Data from the U.S., Europe, Japan, and the UK showed on Monday that manufacturing activity in the world’s largest economies contracted in March. A weaker-than-expected reading on manufacturing activity in China also fed into some doubts over whether oil demand will recover as expected this year, as an economic rebound in the world’s largest oil importer appeared to be running out of steam.

China’s manufacturing sector, which acts as a bellwether for the world’s second-largest economy, is facing increased headwinds from slowing overseas demand, as economic conditions across the globe deteriorate.

This, coupled with concerns that higher fuel prices will push up inflation, also weighed on sentiment, given that stubborn inflation could attract more monetary tightening by major central banks.

“We will need to keep an eye on whether the aggressive tightening from central banks around the world leads to a stronger-than-expected slowdown later in the year. For now, we are still expecting marginal demand growth from OECD countries,” analysts at ING wrote in a note.

They also warned that pinning expectations of demand growth on one country - China - presented a risk to markets.

Oil prices were still trading marginally lower for the year, having been battered by fears of a banking crisis over the prior month. Fears of a potential economic slowdown also kept a lid on crude prices this year.

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