Oil Plunges as Fundamentals Overshadow OPEC+ Cuts


Energy traders are selling the news after OPEC+ kept oil production limited.

Crude oil futures (@CL) fell about 3.6 percent to $74.22 on Monday, their lowest closing price since February 7. It also tied with the biggest one-day drop since January 8, according to TradeStation data.

The decline came after the Organization of Petroleum Exporting Countries plus Russia extended a 3.66 million barrel production cut through the end of next year. However a separate 2.2 million barrel cut will be phased out starting this October.

The selloff also followed TradeStation’s decision to lower day-trading margin rates for popular energy futures. The change covered crude oil, heating oil and gasoline, plus their mini versions. Here’s a list of the symbols:

  • Crude oil (@CL)
  • E-mini crude oil (@QM)
  • Heating oil (@HO)
  • E-mini heating oil (@QH)
  • RBOB gasoline (@RB)
  • E-mini RBOB gasoline (@QU)

Energy Demand

There were potentially bearish signs before the news was announced. First, Reuters and Platts detailed on May 20 how price differentials between different types of North Sea oil reflected weakening demand. Analysts noted that high U.S. interest rates were hurting consumption. That suggests the Federal Reserve’s campaign against inflation was finally working.

Saudi Energy Minster Prince Abdulaziz bin Salman acknowledged the point this week by saying that “we are waiting for interest rates to come down” before increasing production.

Crude oil futures (@CL), daily chart, showing key levels and events.

The U.S. government’s Energy Information Administration (EIA) confirmed the trend of weakening demand on May 31. It noted that diesel demand hit a 26-year low of 3.67 million barrels per day in March. The decline (down 6 percent from February) corresponded to slowing factory activity. That’s potentially noteworthy because manufacturing data has remained tepid since March, including a lower-than-expected index from the Institute for Supply Management yesterday.

Cartel Splits?

While Sunday’s OPEC+ decision tried to show a strong face by producers, there could be divisions within the cartel.

First, Russia admitted to exceeding its production quotas in April. OPEC+ also delayed conversations about individual countries’ quotas, reflecting apparent division over the issue.

Second, analyst Tom Kloza of OPIS said on X that Sunday’s OPEC+ decision “underscores individual member country desires to export more oil.” He predicted “pretty severe disinflation” in gasoline prices soon.

Gasoline futures (@RB), daily chart with key patterns and indicators.

Geopolitics are another potential hit to oil after Israel agreed to a cease fire in Gaza. The decision marked an apparent reversal by Prime Minister Benjamin Netanyahu under pressure from U.S. President Joe Biden.

The Most Crude Ever?

Finally, domestic production is still rising. U.S. fields pumped 408.6 million barrels in March. It was the third-highest total ever, up 3.2 percent from a year earlier.

As the EIA declared back on March 11, the “United States produces more crude oil than any country, ever.”

In conclusion, oil had a historical crash during the pandemic in 2020. A sharp spike followed in 2021 and 2022 as economies reopened and Russia invaded Ukraine. But production has gradually recovered and interest-rate hikes have weighed on demand. Is a longer-term balance between supply and demand emerging?

The decline in prices creates potential opportunity for futures traders. It could also help the broader economy as consumers and investors hope for lower inflation. That could boost the importance of price action in oil — especially with the big inflation report and Fed meeting next Wednesday, June 12.

Security futures are not suitable for all investors. To obtain a copy of the security futures risk disclosure statement visit www.TradeStation.com/DisclosureFutures

Margin trading involves risks, and it is important that you fully understand those risks before trading on margin. The Margin Disclosure Statement outlines many of those risks, including that you can lose more funds than you deposit in your margin account; your brokerage firm can force the sale of securities in your account; your brokerage firm can sell your securities without contacting you; and you are not entitled to an extension of time on a margin call. Review the Margin Disclosure Statement at www.TradeStation.com/DisclosureMargin.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.