U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are up for a third straight session on Friday as major producers began output cuts to offset a slump in fuel demand triggered by the coronavirus pandemic while data showed U.S. crude inventories grew less than expected. Futures are now within striking distance of the close on April 20 which is the day before the steep plunge that saw nearby May futures plunging into negative territory for the first time in history.
OPEC+ Production Cuts Begin
Reflecting the output cuts agreed between OPEC and other major producers like Russia, a grouping known as OPEC+, the imbalance between oil supply and demand is set to be halved to 13.6 million barrels per day (bpd) in May, and drop further to 6.1 million bpd in June, according to Rystad Energy.
“While this may seem like a drastic improvement from April, the oil market is not magically fixed,” said Rystad oil market analyst Louise Dickson. “The storage issue still looms large,” she said, referring to storage space around the world rapidly dwindling.
Demand Destruction Will Continue to Weigh on Prices
Prices are likely to fall further this year even as countries begin to ease restrictions imposed to counter the viral outbreak and the output cuts by big producers will not fix the supply glut, a Reuters poll showed on Thursday.
The estimated shortfall this year is expected to be about 30 million bpd of demand. The impact of the coronavirus pandemic has obliterated demand with much of the world’s population still under some form of economic and social lockdown.
Gains are likely to be capped and selling pressure may resume over the short-run since the 30 million bpd plunge in demand is three times the size of the OPEC+ output cuts.
Prices could remain underpinned over the near-term, however, because of signs of a tightening of U.S. supply. Although storage capacity is expected to run out soon, this week’s data from the U.S. Energy Information Administration (EIA) showed crude inventories rose by 9 million barrels to 527.6 million barrels during the week-ending April 24. This was less than the 10.6 million-barrel rise analysts had forecast in a Reuters poll.
Bullish traders and domestic oil companies are hoping this developments into a trend. Nonetheless, industry professionals would like to see more aggressive cuts in production by U.S. producers.
This article was originally posted on FX Empire
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