Concerns About Weakening Demand, Oil Prices Continue To Drop

JAKARTA - crude futures prices continued to weaken at the end of trading Wednesday, May 31. This is amid concerns over oil demand following weak data from major Chinese oil importers and the increasing chance of an increase in the Federal Reserve interest rate in June.

West Texas Intermediate (WTI) crude futures for July delivery fell 1.37 dollars, or 1.97 percent, to settle at 68.09 dollars a barrel on the New York Mercantile Exchange.

Brent crude futures for July delivery ended Wednesday (31/5/2023) down 88 cents, or 1.20 percent, to settle at 72.66 dollars a barrel on the London ICE Futures Exchange. Meanwhile, Brent for August delivery fell 1.11 dollars to 72.60 dollars per barrel.

Oil prices fell after Chinese data showed manufacturing activity contracted faster than expected in May, due to a weakening demand to cut the manufacturing manager's index (PMI) officially down to 48.8 from 49.2 in April, lagging behind 49.4.

The dollar index, which measures US units against six major rival currencies, has the support of cooling European inflation and progress on the US bipartisan debt ceiling bill, which will be submitted to the House of Representatives for debate.

"We have China data that is weaker than expected, debt limit situations, flat spending for two years, and the possibility of rising interest rates next month weighing on the market," said Bob Yawger, director of energy futures at Mizuho.

US macroeconomic data and labor markets that are weaker also weigh on investor sentiment despite the seasonal decline in oil demand in the summer.

Chicago's purchase manager's index, which measures the performance of the manufacturing and non-manufacturing sectors in the Chicago region, fell to 40.4 in May, lower than 48.6 in April and 47 from consensus estimates, according to data released by the Institute for Supply Management (ISM) - Chicago on Wednesday (31/5/2023).

The potential impact of the US debt ceiling disaster and the increased chance of another Federal Reserve increase in June weighed on oil, according to US financial research firm Sevens Report Research analysts.

However, UBS strategist said investors should return to the oil market as larger supply withdrawals become more visible in the months to come.

World average daily demand for oil is likely to approach 102 million barrels in June while global daily oil production will drop again to 100 million barrels in the second quarter of 2023 from about 101 million barrels in the first quarter.