Oil up 2% due to tighter supply, Oil prices rose by over 2% on Wednesday as signs of tighter supply,
a weaker dollar and optimism over a Chinese demand recovery combined to support the market.
Topics
Oil Prices Surge
IEA Expects Russian Crude Production
The Impact of China’s Economic Slowdown
Oil Prices Surge
The rally was led by Brent crude, the international benchmark,
which climbed $1.29 to settle at $62.16 a barrel.
West Texas Intermediate (WTI), the U.S. benchmark,
gained $1.11 to settle at $58.64 a barrel after earlier touching an intraday high of $59.07.
The gains came as data showed that U.S. oil inventories fell more than expected last week while production remained steady.
The data added to evidence that crude markets are tightening as global demand recovers from the coronavirus pandemic.
Meanwhile, the dollar weakened against most major currencies,
making oil and other commodities cheaper for holders of other currencies.
A weaker dollar makes oil and other commodities cheaper for buyers using stronger currencies like the euro or yen,
stimulating demand and often leading to higher prices,
In addition, there were reports that China’s state-owned energy companies have been increasing
their purchases of crude in recent weeks in anticipation of further price increases
All these factors contributed to today’s rally in oil prices.
But the likelihood that OPEC+ will leave output unchanged at its upcoming meeting limited the gains.
Brent crude futures rose $2.06, or 2.48% to $85.09 per barrel by 1044 GMT on Wednesday,
while U.S West Texas Intermediate (WTI) crude futures climbed $1.69, or 2.16%, to $79.89
following expectations of tighter crude supply due to falling U.S. stocks.
The more active February Brent contract rose by 2%, to $85 95 ahead of the meeting,
at which OPEC+ is expected to discuss production policy.
Analysts polled by Reuters expect no change in output,
although some have forecast a reduction in Saudi Arabia continuing with its voluntary cuts beyond December.
IEA Expects Russian Crude Production
The International Energy Agency (IEA) is expecting Russian crude production
to be cut by 2 million barrels of oil per day (BPD) in the first quarter of next year.
This is due to the continued decline in global demand for oil, as well as the ongoing coronavirus pandemic.
IEA chief Fatih Birol told Reuters that this cut in production would help to rebalance the global oil market and support prices.
He also said that there was some optimism over a demand recovery in China,
which could help to offset some of the cuts in production.
However, it is worth noting that weekend protests could lead to further travel restrictions being imposed in China,
which could impact the demand for oil once again.
A fall in the value of the US dollar has been a key driver of oil prices in recent weeks,
with a weaker greenback making dollar-denominated oil contracts cheaper for holders of other currencies.
This has helped to boost demand for oil, offsetting some of the bearish factors that have weighed on prices.
Fed Chair Jerome Powell is scheduled to speak about the economy and labour market on Wednesday,
and investors will be closely watching for any clues about when the Fed may start to slow the pace of its aggressive interest rate hikes.
Capping gains, news that OPEC+ will hold its next meeting virtually signals little likelihood of a policy change, according to a source with direct knowledge of the matter. This suggests that production cuts are likely to be extended into 2019, keeping a lid on prices.
The market fundamentals are currently favouring another cut in oil production, especially given the uncertainty surrounding China’s COVID situation. Failure to make this cut could risk sparking another selling frenzy, according to Stephen Brennock of oil broker PVM.
The Impact of China’s Economic Slowdown
Investors are closely watching the situation in China as the country is a major consumer of oil.
If there is a prolonged slowdown in economic activity there, it could have a significant impact on global demand for crude.
The OPEC+ group of producers has been cutting output since 2017 to prop up prices,
and another reduction would help support prices and prevent them from falling further.
However, not all members of OPEC+ are on board with making another cut currently.
Russia has been reluctant to agree to further reductions,
and any disagreement within the group could scuttle any deal.
Investors will be closely monitoring negotiations between OPEC+ members over the next few weeks for any clues about whether a new production cut will be agreed upon.
“Market fundamentals favour another cut, especially given the uncertainty over China’s COVID situation.
Failure to do so risks sparking another selling frenzy,” said Stephen Brennock of oil broker PVM.