U.S. data on crude oil storage levels and compliance among parties to OPEC+ production cut will be factors to watch this week in terms of oil prices, according to analysts.
Fuel Fix surveyed analysts on their outlook for oil prices. Brent crude, the international benchmark, has been stuck around $45 per barrel for much of August. The U.S. benchmark, West Texas Intermediate, has largely traded within a $1 or $2 of $40 a barrel.
Oil prices, like other macroeconomic metrics, have been bruised by the quarantine economy. For Japan, the world’s third-largest economy, that bruise was an annualized economic contraction of 27.8 percent in the second quarter, its largest decline on record. At least on paper, demand may be improving in the United States, where economic activity plummeted 32.9 percent during the April-June period, also a record decline. The International Energy Agency and OPEC both lowered their latest demand forecasts, though oil prices remained resilient.
For Tamas Varga, an analyst at oil brokerage PVM in London, it’s likely the improvement in U.S. employment that’s keeping a floor under the price of oil as Americans resume commuting, traveling and spending. The unemployment rate fell to 10.2 percent last month after peaking at 14.7 percent in April, according to the Labor Department.
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That has been followed by declines in stockpiles of crude oil and petroleum produces. Commercial crude inventories fell by 4.5 million barrels in the week ending Aug.7, according to the Energy Information Administration.
“US oil demand is picking up,” he said. “If EIA shows another stock draw and demand recovery this week, further price support is anticipated.”
Crude oil prices are getting some support from U.S. economic trends, but those gains are offset by weaknesses in other economies, such as Japan’s. OPEC will need to consider those and similar issues when they meet Wednesday to discuss whether to further ease steep production cuts put in place after demand and prices collapsed in the spring.
OPEC this year decided to trim production by 9.7 million barrels per day, but eased the output cuts to 7.7 million barrels per July, betting that demand would improve enough to allow more oil to come on the market. OPEC, however, is likely producing above the quota as members such as Iraq aren’t sticking to their agreed upon cuts.
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Ellen R. Wald, president at Transversal Consulting in Jacksonville, Fla, said OPEC will likely lean on the cheaters to stick to the agreed production cuts to give Saudi Arabia and Russia the room to increase production while meeting the ultimate goal: pushing prices higher through the rest of the year.
Ole Hanson, the head of the commodity strategy at the Saxo Bank in Denmark, said oil hasn’t been able to break above the 200-day moving average, which is around $42.65 per barrel for the US crude oil price. If crude oil prices can’t break that threshold, he said, then oil prices are due for a “long overdue correction” and would fall back below $40 a barrel.
Daniel J. Graeber is a veteran energy correspondent and founder of The GERM Report, a survey of the intersection between energy and foreign affairs. Each Monday, he’ll look ahead at what to expect in oil markets and the energy industry.