Oil prices extended losses into Asian trade on Friday amid persistent fears that slowing economic growth will erode demand this year, with dismal readings from China further denting sentiment. 

Chinese inflation data disappoints 

Chinese consumer inflation shrank in May from the prior month, while factory gate inflation hit a seven-year low as an economic recovery in the country sputtered through the second quarter.

The readings, coupled with a string of weak economic prints from the country over the past two weeks, further undermined bets that a recovery in China will push oil demand to record highs this year. 

Fears of slowing demand also largely offset signs of tighter supply following a fresh production cut by Saudi Arabia, and put crude prices on course for a second straight week of losses.

Brent oil futures fell 0.7% to $75.44 a barrel, while West Texas Intermediate crude futures fell 0.7% to $70.81 a barrel by 22:18 ET (02:18 GMT). Both contracts were set to lose between 0.6% and 1.2% this week. 

While Chinese oil imports still rose through May, analysts attributed the rise largely to local refiners building inventory, and that fuel demand in the world’s largest oil importer still remained weak.

U.S. data also provides headwinds to crude 

Soft economic indicators from the world’s largest oil consumer also stymied crude markets this week.

U.S. inventory data showed that gasoline stockpiles unexpectedly rose in the past week, ducking expectations that fuel demand will increase as the travel-heavy summer season approaches.

Signs of a U.S. economic slowdown continued to trickle in, with recent indicators showing that business activity slowed through May, while the jobs market showed some signs of cooling. The weak readings pulled down the dollar, but offered little support to crude as traders fretted over worsening U.S. growth.

Reports of a U.S.-Iran nuclear deal, which could flood the market with more crude, also dented oil prices this week, although White House officials denied any such agreement.

Focus is now squarely on an upcoming Federal Reserve meeting next week, for more cues on how the central bank plans to approach policy amid worsening economic conditions.

Market expectations are largely skewed towards a pause in the Fed’s rate hike cycle, which could provide some near-term support to oil by weighing on the dollar.

But given that recent personal consumption and labor market indicators still beat expectations, traders remained uncertain over just what the Fed will signal.

This uncertainty also weighed on oil markets through the week.

Oil prices looked set to post their second straight weekly loss as prices continued to fall on Friday over demand concerns and scepticism that the United States and Iran could strike a nuclear deal.

Brent crude futures dropped 35 cents, or 0.5%, to $75.61 a barrel by 0304 GMT, while the U.S. West Texas Intermediate crude futures eased 35 cents, or 0.5%, to $70.94.

“Oil prices are expected to stay in a range of about 3 dollars above and below $70 for WTI in the near term,” Satoru Yoshida, a commodity analyst with Rakuten Securities.

Both benchmarks slid by around $1 on Thursday, rebounding from their earlier losses of more than $3, after the U.S. and Iran both denied a report by the Middle East Eye that they were close to a nuclear deal.

For the week, they were on track for losses of about 1% losses, after shedding about the same amount in the previous week.

Oil prices had risen early in the week following Saudi Arabia’s pledge over the weekend for deep output cuts, but they pared gains after rising U.S. fuel stocks and weak Chinese export data.

Yoshida said factors such as fears over tighter supply and higher demand as the United States enters driving season which could drive prices higher were being offset by worries over a slow pickup in China’s fuel demand.

“Crude prices didn’t get any favours from China as their economic recovery has disappointed,” OANDA analyst Edward Moya said.

While a Reuters poll of economists showed the U.S. Federal Reserve could skip a rate hike at its June 13-14 meeting, the absence of similar signals from other major central banks was weighing on the oil demand outlook, Moya added.

Saudi Arabia kept under wraps its plan to make a deep cut to its own oil output during a weekend of OPEC+ talks in Vienna, several OPEC+ sources told Reuters, with some member states only learning about the reduction from the final news conference.

Saudi Arabia is the top OPEC producer and the member with the most flexibility to raise or cut output, giving the kingdom unrivalled influence over the oil market – although the impact on oil prices since announcing its plans has been modest so far.

The Saudi Energy Minister Prince Abdulaziz bin Salman has previously used the power of surprise in managing oil markets, where prices have come under pressure due to concerns about the weakness of the global economy and its impact on demand.

Days before the OPEC+ meeting, Prince Abdulaziz said he would inflict more pain on short sellers – those who bet that oil prices will fall – and told them to watch out. He announced the output cut after the meeting, calling it a “Saudi lollipop”.

Four OPEC+ sources, who were among their countries’ delegations involved in policy talks, said they only heard details of the Saudi cut at the Sunday evening news conference – and that the idea of a cut didn’t come up during a weekend of discussions on a broader deal to limit supply into 2024.

“No information on the additional cut was shared prior to the press conference,” one of the four sources said. “It was a surprise one, once again.”

Saudi Arabia said it would cut output in July by 10% or 1 million barrels per day (bpd) to 9 million bpd and may extend cuts further if needed. Meanwhile, OPEC+ agreed to extend cuts into 2024 but didn’t commit to any fresh cuts in 2023. 

OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies led by Russia, pumps around 40% of the world’s crude.

As well as the Saudi cut, OPEC+ lowered its collective production target for 2024 and the nine participating countries extended the April voluntary cuts to the end of 2024.

The United Arab Emirates secured a higher output quota that it had long been seeking – an issue that has caused tension between the group and Abu Dhabi, which has been increasing its output capacity.

The Saudi Energy Ministry and OPEC’s Vienna headquarters did not respond to requests for comment.

‘CAN’T PUSH THE OTHERS’

In the days leading up to the June 4 meeting, two other OPEC+ sources said there was an idea for more cuts by OPEC+ states, although this did not proceed to advanced discussions in Vienna.

Saudi Arabia, other OPEC+ sources said, recognised it would be difficult to secure cuts from others such as the UAE and Russia, which according to sources in the days before the meeting was reluctant to cut output further.

“The Saudis were cognizant this time they could not push the others,” an OPEC+ source said. “The UAE are happy with the new quota and it is a big relief for the Saudis.”

Still, Saudi Arabia did manage to persuade other members of OPEC+ that have been unable to produce at required levels due to lack of investment in capacity – notably Nigeria and Angola – to accept lower production targets for 2024 after long meetings.

Prince Abdulaziz told Al Arabiya after the meeting the group was tired of giving quotas to countries that were unable to produce them and that Russia needed to be transparent about its output and exports levels.

OPEC+ sources said the new targets for Angola and Nigeria were still higher than the countries can realistically pump, which means they do not have to perform real cuts.

Russia, whose exports have stayed strong despite Western sanctions, also avoided having to make a further reduction.

It is unclear if Saudi Arabia hinted about its possible voluntary cut to some officials in Russia or the African producers to help persuade them to agree a broader deal.

Nonetheless, all those producers stand to benefit if they can keep output the same or pump a bit more, especially if the Saudi cut boosts prices. 

The Saudi cut could also give the kingdom more leverage in coming months to pressure countries that are not cutting output and yet benefit from others’ cuts, one OPEC+ source said.

“To avoid free rider behaviour, Saudi Arabia could threaten to put 1 million bpd back on the market within 30 days, which would lead to a drop in prices,” another OPEC+ source said. He did not name which countries this might be directed at.

So far, oil prices have risen slightly following the Saudi plan. Brent crude is trading higher than $77 on Thursday, up from Friday’s close just above $76.

“Saudi cuts are playing second fiddle to worries about the state of the global economy,” said Stephen Brennock of oil broker PVM, although he added the Saudi cut could widen a supply deficit in July.

“Accordingly, it will take a brave man to bet against an eventual uptick in prices.”