By Barani Krishnan
Investing.com - It’s official: OPEC will roll back production cuts by 2.1 million barrels per day from August.
But before market bears could express their full negative reaction to that, another development got in their way Wednesday: blockbuster numbers for weekly U.S. crude draws reported by the Energy Information Administration.
The EIA said crude stockpiles fell 7.5 million barrels for the week ending July 11. Analysts tracked by Investing.com had expected a decline of 2.1 million barrels, after the previous week’s rise of 5.6 million barrels.
The outsize draw propelled crude prices up by more than 2%.
New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, settled up 91 cents, or 2.2%, at $41.20 per barrel.
London-traded Brent, the global benchmark for oil, closed up 89 cents, or 2.1%, at $43.79.
“Crude prices jumped (after) following both the OPEC+ recommendation to slowly bring back some oil supplies, and after the EIA crude oil inventory report showed a much larger draw and some signs that demand is improving,” said Ed Moya, an analyst at New York’s OANDA.
The demand improvement reported by the EIA included a drawdown of 3.1 million barrels in gasoline stockpiles and nearly 1.5 million barrels in diesel-dominated distillate inventories. Analysts had expected a gasoline stockpile drop of 643,000 barrels and distillate build of nearly 1.5 million barrels for last week.
And while the consensus forecast for the crude draw was just around 2 million barrels, many traders began setting the bar higher after industry group American Petroleum Institute issued an inventory snapshot of its own late on Tuesday indicating that the decline could be as high as 8.2 million.
One reason for the outsize crude draw: a plunge in imports to four-year lows.
Crude inflows into the United States fell by 1.8 million barrels last week, the EIA said, underscoring months of work by OPEC, or precisely Saudi Arabia, to reduce shipments to the United States in order to create low inventory levels that would boost WTI prices.
“Imports posted the worst weekly drop since 2016, a plunge of 25%,” said Moya, reflecting on the 1.8-million barrel decline for last week. “The oil market is continuing to make its way towards balance, but until the demand outlook improves, WTI crude will struggle to break away much.”
The decision by OPEC, or the Organization of the Petroleum Exporting Countries, to roll back production cuts from August could well affect the demand outlook for oil.
The Saudi-led and Russia-assisted OPEC+ alliance will withhold 7.7 million barrels a day from the market in August, compared with cuts of 9.6 million currently.
“As we move to the next phase of the agreement, the extra supply resulting from the scheduled easing of production cuts will be consumed as demand continues on its recovery path,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the start of an OPEC+ video conference on Wednesday. “Economies around the world are opening up, although this is a cautious and gradual process. The recovery signs are unmistakable.”
As though he could anticipate that the media will emphasize on the roll-back in cuts rather than the likely growth in demand ahead, the Saudi prince implored the press on Wednesday to “please report the whole story”.
But regardless of his imploring, a 2 million-barrel reduction in OPEC cuts could go a long way in negating the weekly U.S. crude draw — particularly if the Saudis start sending more of their cargo in the direction of the United States, the world’s largest oil consumer.
And the jury is still out on how demand for oil could fare amid the new wave of coronavirus infections across the world. In the United States, the virus has infected more than 3.5 million people and killed almost 140,000, with new record highs being set in some U.S. states for daily caseloads.