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Oil slipped from the highest settlement in 11 weeks on signs Russia was planning to start easing supply cuts from July, while tensions between the U.S. and China escalated amid the specter of sanctions.
Futures fell 1.3% in New York after closing above $34 a barrel for the first time since March. Moscow wants to scale back output curbs in line with the OPEC+ deal, according to people familiar with the matter, but a Kremlin spokesman said that Russia would analyze the market before making a decision. Relations between the U.S. and China are deteriorating further as Washington considers sanctions to punish Beijing for its crackdown on Hong Kong.
At the same time, the outlook for the physical oil market continued to improve. Nigeria and Algeria have lifted the official selling prices for their crude, a sign that they believe customers are willing to pay more for their barrels, while U.S. stockpiles are expected to extend declines.
Supply cuts and the recovery of demand in some countries following the easing of lockdown restrictions has led to oil surging about 80% this month after slumping below zero in April. However, U.S. gasoline consumption was muted over the Memorial Day weekend – typically the peak period for American fuel demand – signaling the global rebound is likely to be slow and uncertain.
OPEC and its allies agreed to reduce output by almost 10 million barrels a day from the start of May in an effort to drain a worldwide glut. As part of that deal, cuts would slowly taper from July. Three Russian officials and two people in the industry, speaking on condition of anonymity, said the nation’s position is to stick to that plan. OPEC+ is scheduled to gather again next month.
“With the approach of the next OPEC+ meeting on June 9, attention is back on how the Russia-Saudi ideological divide plays out in their supply management strategy for the second half of the year,” said Vandana Hari, founder of Vanda Insights in Singapore. The market may view an easing of production cuts from July as premature, she said.
The U.S. Treasury Department could impose controls on transactions and freeze assets of Chinese officials and businesses for implementing a new national security law in Hong Kong, according to people familiar with the matter. The Trump administration is weighing whether to declare the former British colony has lost its autonomy from Beijing.
U.S. crude inventories probably fell by 2.5 million barrels last week, according to a Bloomberg survey. If confirmed by government data on Thursday, that would be the third consecutive weekly draw. The fragile nature of the recovery in America was on display over the Memorial Day weekend, with gasoline demand dropping an estimated 25% to 35% from a year earlier.
