With supply concerns resulting from OPEC+’s output target reduction last week, oil futures recovered some losses on Wednesday after falling 2% the previous day. However, the strengthening dollar dampened confidence.
After reaching a session low of $93.33, Brent oil futures were up 36 cents, or 0.4%, at $94.65 a barrel at 0920 GMT. After hitting a session low of $88.27, U.S. West Texas Intermediate crude was up 21 cents, or 0.2%, at $89.56. According to OANDA analyst Craig Erlam, the economic outlook is the main downside risk, while OPEC+ is the main upward factor in the oil market. The latter reasserted itself last week with the reduction of 2 million barrels per day, but growth worries still exist in the markets, which may prevent the price from rising.
The Supply Cut’s Impact on Prices
OPEC+, often known as the Organization of the Petroleum Exporting Countries, and its allies, including Russia, opted to reduce their daily output target by 2 million barrels last week (BPD).
According to a note from Citi Research, although OPEC+’s 2 million BPD headline oil output cut from the August quotas looks large on paper, the effective cut would be smaller. Citi Research added that it anticipates the final cut to be less than 900,000 BPD, partly because of Iraq’s poor compliance. On the supply side, Transneft, the state-owned pipeline monopoly in Russia, said on Wednesday that it had been informed by Polish operator PERN of a leak on the Druzhba oil pipeline.
Meanwhile, on Wednesday, due to worries about inflation and the rate at which U.S. interest rates are rising, the U.S. dollar rose to a 24-year high versus the yen.
Oil and other risky assets often suffer when the dollar is stronger because it makes commodities denominated in dollars more costly for owners of other currencies. On the negative side, the International Monetary Fund lowered its projection for global growth in 2023 and issued a warning about the growing possibility of a world recession. On Thursday, the U.S. consumer pricing data is due.