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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Thursday after OPEC and other major producers including Russia agreed to ease record supply curbs from August. The move is risky because the rise in coronavirus infections in the United States and around the world could lead to a second round of demand destruction if the outbreak cannot be contained. However, some traders are downplaying the threat, citing tightening global inventories and a pick-up in the economy as reasons to remain optimistic.

At 11:48 GMT, September WTI crude oil is trading $40.95, down $0.45 or -1.09% and September Brent crude oil is at $43.47, down $0.32 or -0.73%.

A drop in demand for higher-risk assets is also putting a lid on prices, but losses are being cushioned by better-than-expected GDP data out of China.

OPEC+ Says Production Cuts Will Be Tapered

OPEC and its allies agreed on Wednesday to scale back oil production cuts from August as the global economy slowly recovers from the coronavirus pandemic.

OPEC+ has been reducing output since May by 9.7 million barrels per day, or 10% of global supply, but from August, cuts will officially taper to 7.7 million bpd until December.

Despite the official OPEC+ accord, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said production cuts in August and September would end up amounting to about 8.1 million-8.3million bpd, more than the headline number. That’s because countries in the grouping which over-produced earlier this year would compensate by making extra August-September cuts, the minister said.

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International Energy Agency Executive Director Fatih Birol said on Wednesday that global oil markets are slowly rebalancing after the shocks seen during the coronavirus lockdown, with prices expected at about $40/barrel in the coming months.

Daily Forecast

Today’s price action indicates that some investors are booking profits after the OPEC+ decision, but the big reduction in U.S. crude supplies provided some support. On Wednesday, the Energy information Administration (EIA) said U.S. crude inventories fell 7.5 million barrels the week-ending July 10. This was more than the 2.1 million-barrel drawdown predicted by analyst.

Analysts at Rystad Energy said in a note that oil prices are expected to remain static as an increase in crude processed by refineries is likely to offset higher supply volumes.

“We find that prices will have to stay where they are for the rest of 2020 as any uptick will hurt already struggling refining margins and negatively impact the most-needed recovery in refinery runs.”

After a short-term setback, prices are likely to stabilize as long as the economy continues to improve. However, raising supply even slightly, combined with another drop in demand due to COVID-19, could trigger even steeper losses.

For a look at all of today’s economic events, check out our economic calendar.

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