DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange pared back OPEC-fueled gains during Monday's afternoon session as traders balanced deeper production cuts by Saudi Arabia against weakening macroeconomic data in the United States, showing services -- the largest sector of the economy -- is teetering on the brink of recession.

Figures released this morning by the Institute of Supply Management showed business activity in U.S. service industries declined to the lowest level since December 2022 when it briefly dipped into recession. At 50.3%, the U.S. service index is barely in expansion territory, with 50 separating expansion and contraction.

"There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times, which are in many ways a product of sluggish demand," said Anthony Nieves, Chair of the Institute for Supply Management, adding that "the majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy."

U.S. manufacturing sector, which accounts for a large percentage of diesel fuel consumption, contracted in May for the seventh straight month and is now at the lowest level since the early days of the COVID pandemic in May 2020. The index has already been below 50 for longer than in most mid-cycle slowdowns, generally eight months or fewer, though not as long as in most recessions, which average 11 months or more. The forward-looking new orders component, however, slumped to just 42.6 in May, signaling activity is likely to continue falling for several more months at least.

Against these headwinds, Saudi Arabia announced a unilateral 1 million bpd production cut effective in July, taking its crude output to a multiyear low, while all members of the OPEC+ alliance agreed to extend voluntary output adjustments of 3.6 million bpd through the end of 2024. The bold move will likely deepen a widely expected supply deficit in the later part of the year, with Rystad Energy estimating a deficit as large as 3 million bpd by the third quarter.

What's more, Saudis want to keep the "market in suspense," and will review additional production cuts each month without any forward guidance on the plans to either reverse production cuts or extend them.

"I would have to call it Saudi lollipop," said Prince Abdulaziz bin Salman during a news conference aired live after the OPEC+ meeting, referring to the agreement as "unprecedented due to the quality of its cooperation."

That cooperation, however, came at the cost of Saudi sacrificing market share to its two key allies -- Russia, which made no commitment to cut output deeper, and the United Arab Emirates, which secured a higher production quota for 2024.

The UAE production ceiling has been revised higher by 200,000 bpd beginning from January 2024. The Emiratis have emerged as a clear winner of the weekend negotiations, with Abu Dhabi lobbying for a higher output ceiling for over two years. Emirati Energy Minister Suhail Al Mazrouei thanked his OPEC+ colleagues and expressed the country's loyalty to the cartel.

As for Russia, a country battered by Western sanctions but managed to sustain its pre-war level of crude exports, secured no revisions to its production quotas until the end of 2024 despite its leadership role in OPEC+. Russia has aggressively recaptured market share from its Saudi partner in Asian markets by selling discounted oil barrels. Russian Deputy Prime Minister Alexander Novak attempted to reassure the market that Moscow is "delivering on its oil output commitments and has already achieved the targeted cuts."

At settlement, West Texas Intermediate July futures added $0.41 to $72.15 bbl after hitting a five-week high on the spot continuous chart of $75.06 bbl. August Brent contract gained to $76.71 bbl, up $0.58 bbl, also paring an advance to a five-week spot high at $78.73 bbl. NYMEX RBOB July futures advanced $0.0237 to $2.5244 gallon and NYMEX ULSD futures gained $0.0206 to $2.3775 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com .