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James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled higher last week as speculative investors continued to increase bets that OPEC and its allies would come through with the production cuts a technical committee recommended the week-ending February 7. Short-covering may have also contributed to the rally with traders turning a little more optimistic that the corona-driven demand crisis had reached a peak. The markets are also on track for their first weekly gain since early January.

Last week, April WTI crude oil settled at $52.05, up $1.73 or +3.44% and April Brent crude oil finished at $57.32, up $2.85 or +4.97%.

OPEC, IEA Cut Crude Oil Demand Growth Forecasts This Year

OPEC cut its forecast for oil demand growth this year, saying the coronavirus outbreak was the primary reason. The cartel said it now expects 2020 daily oil demand growth to be 990,000 barrels per day (bpd), which is 230,000 bpd below prior forecasts.

Meanwhile, the International Energy Agency (IEA) said oil demand is set to fall year on year in the first quarter for the first time since the depths of the financial crisis in 2009 hurt by the coronavirus outbreak in China.

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Corona Virus Update

Crude oil jumped more than 3% at the high earlier in the week as traders eyed deeper production cuts from OPEC, and as China reported the lowest number of new coronavirus cases since the end of January, easing concerns about a drop-off in demand for oil.

Conditions changed later in the week, however, after China’s Hubei province, where the virus is believed to have originated, reported 242 new deaths, double the previous day’s toll and the fastest rise since the pathogen was identified in December.

Ahead of the week-end, traders were reacting as if Chinese officials had the spread of the coronavirus outbreak under control.

U.S. Energy Information Administration Weekly Inventories Report

The Energy Information Administration (EIA) said on Wednesday that U.S. crude supplies rose by 7.5 million barrels for the week-ended February 7. Traders were looking for a 2.9 million barrel build.

The EIA data also showed a supply decline of 100,000 barrels for gasoline, while distillate stocks fell by 2 million barrels. Traders were expecting gasoline inventories to rise 700,000 barrels, however, distillates were forecast to fall by 900,000 barrels.

Weekly Forecast

The bearish demand forecasts from OPEC and the IEA are likely going to encourage OPEC and its allies, especially Russia, to implement the additional production cuts recommended the week-ending February 7.

An OPEC+ technical committee recently recommended expanding production cuts to put a floor under falling oil prices, although there was some resistance from Russia. The major producer said it needed more time, but the new demand forecasts are likely to encourage Russia to sign off on the OPEC+ deeper cut.

Short-covering should drive prices higher if Russia announces it is going along with the output cuts, but gains will be limited since the cuts will not be enough to overcome the demand decline. If Russia passes on the cut, then this will be a disaster. Prices will plunge to multiyear lows.

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