U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished lower last week. The week began with the promising news that OPEC and its allies, including Russia, would increase their production cuts to offset the expected decline in demand caused by the impact of the coronavirus on China’s economy.
However, hopes of an immediate cut to production were dampened late in the week when Russia said it would need time to study the new plan.
OPEC+ Technical Committee Recommends Production Cuts
Prices were boosted last Thursday after a technical committee advising OPEC and its allies led by Russia, known as OPEC+, agreed to recommend a provisional additional cut in oil output of 600,000 barrels per day (bpd) as it awaited the final position of Russia on the proposal, two sources told Reuters.
If adopted at a future meeting of OPEC+, the total size of the output curb from the group would rise to 2.3 million bpd.
“Saudi Arabia seems ready to push a very proactive and immediate production response,” bank RBC said in a note.
Russia Needs More Time
Crude oil futures edged low enough on Friday to take the markets down the week after Russia said it would need more time before committing to output cuts along with OPEC and other producers amid falling demand for crude as China battles the coronavirus epidemic.
Russian Foreign Minister Sergei Lavrov said on Thursday that Moscow supported cooperation with other producers, in remarks which appeared to boost prices initially.
However, Energy Minister Alexander Novak said on Friday Russia needed a few days to analyze the oil market and would clarify its position on deeper cuts next week.
US Energy Information Administration Weekly Inventories Report
Gains were capped on Wednesday after data from the U.S. Energy Information Administration (EIA) showed crude inventories rose by 3.4 million barrels during the week-ending January 31, higher than forecast. Traders were looking for a 3.0 million barrel build.
Gasoline inventories fell 100,000 barrels during the last week of January. Gasoline production in the seven days to January 31 averaged 9.9 million bpd, versus 9.2 million bpd a week earlier.
Distillate fuels fell 1.5 million barrels last week. Distillate fuel production last week averaged 5 million bpd, down from a week earlier.
Low Global Oil Demand Predicted
Earlier in the week, BP finance Chief Brian Gilvary told Reuters the economic impact of the coronavirus will reduce oil consumption for the whole year by 300,000 to 500,000 bpd, roughly 0.5% of global demand.
Russian Energy Minister Alexander Novak predicted on Thursday global oil demand may fall by 150,000-200,000 barrels per day (bpd) in 2020 amid the virus – a relatively conservative forecast.
On Friday, prices retreated from their highs after China’s central bank governor said the world’s second-biggest economy may experience disruptions in the first quarter.
Eurasia Group said it estimates a contraction in oil demand in China, the world’s biggest importer of crude, of as much as 3 million bpd in the first quarter from 2019 levels.
With Russia saying it needs time to decide on oil output cuts, crude oil prices are likely to remain under pressure early next week. Russia said on Friday it needed more time to decide whether to join any additional oil output cuts by OPEC, saying U.S. crude production growth would slow and global demand remained solid.
In making his decision to wait, Novak also said U.S. oil output was not expanding as fast as before.
“Growth is slowing down in the United States. It was 1.3 million bpd last year…This year, we expect less than 1 million,” he said. “Oil production growth is slowing down there due to lower prices.”
We don’t know for sure when Russia will make its decision, but it should be a market moving event. If Russia decides to go along with the production cuts then look for a short-covering rally. If Russia passes on the cuts, prices could plunge to multi-year lows.
This article was originally posted on FX Empire
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