Oil futures faced a downward trend early on Wednesday due to concerns about the demand outlook. Traders were eagerly awaiting official data on U.S. crude and product inventories as oil futures seemed to be heading for a three-day losing streak. This comes after a seven-week winning streak was broken last week.
According to commodity strategists at ING, Warren Patterson and Ewa Manthey, the recent slowdown in the rally of oil can be attributed to China's macro issues and the growing expectation that the U.S. Federal Reserve might continue its tightening cycle. The property sector troubles in China have raised concerns about lackluster economic data from the world's second-largest oil consumer. Furthermore, investors are eagerly anticipating Federal Reserve Chair Jerome Powell's speech at an annual symposium on monetary policy in Jackson Hole, Wyoming, on Friday.
Patterson and Manthey also mentioned that a stronger U.S. dollar is adding to the challenges faced by oil futures. A stronger dollar tends to have a negative impact on commodities priced in it, making them more expensive for users of other currencies.
Meanwhile, Iran has quietly increased its oil output to a little over 2.9 million barrels a day, the highest since late 2018. According to the ING analysts, Tehran aims to reach 3.4 million barrels a day by the end of summer, just short of its pre-sanction pace of 3.8 million barrels a day. They noted that Iran has taken advantage of the focus on Russian flows since the war to boost its oil exports.
Overall, while oil futures face challenges from various factors including demand outlook worries and a stronger dollar, Iran's increased output poses an additional factor affecting the market dynamics.
Crude Oil Continues to Outperform, Risks Turn Mixed
According to analysts at Goldman Sachs, despite a pullback in August following a rally in July, oil remains one of the top-performing assets. In a note on Wednesday, they stated that risks to their year-end target of $86 a barrel for Brent crude have shifted from "bearish to mixed" over the past month.
One of their main concerns, which was high crude stocks, has diminished due to production discipline by OPEC+ members. Saudi Arabia, in particular, has implemented a 1 million barrels per day (mbd) production cut that started in July and will continue until September. The analysts believe that Saudi Arabia may reduce its extra production cut to 500kb/d in October, but they also suggest that Saudi production could remain at its current low level of 9mb/d for a longer period if they aim for a more aggressive price target.
Meanwhile, the analysts note that Russian production is steadily decreasing and is slightly below their forecast of an average liquids production of 10.7mb/d for the remainder of the year.
In other news, the American Petroleum Institute reported a 2.4 million barrel decrease in U.S. crude inventories last week. The official inventory data from the Energy Information Administration is set to be released on Wednesday morning.
Analysts surveyed by S&P Global Commodity Insights expect the EIA data to show a drop of 4.24 million barrels in crude inventories last week, as refinery runs increase and exports accelerate. Additionally, gasoline stocks are expected to see a decrease of 1.15 million barrels, while distillate stocks are predicted to remain relatively unchanged.