OIL PRODUCTION CUT FAILS TO HOLD PRICES

Oil Prices Respond to OPEC+’s Production Cut and EIA Data

Previously oil prices demonstrated resilience subsequent to the announcement of an OPEC + “deep” production cut. While the specified reduction of 2 million barrels per day fell short of the initially targeted 3.5-million-barrel daily shortfall, the market’s response was positive. This surge was further amplified by the Energy Information Administration’s revelation of a significant drop in weekly U.S. crude and fuel inventories. Crude prices enjoyed an increase of approximately $2 per barrel and extended their gains.


U.S. Crude Inventories Decline, but Mixed Data Reflects Global Dynamics

U.S. crude inventories marked a notable reduction of 6.1 million barrels, reaching 433.5 million barrels for the week ending August 18. This decrease exceeded expectations of a 2.8 million-barrel decline, contributing to a global trend of dwindling stocks. China’s state-owned refiners also scaled back operating rates, signifying robust demand. However, an increase in U.S. gasoline stocks during the previous week indicated weaker-than-projected fuel demand.

In parallel, the Energy Information Administration (EIA) unveiled data revealing U.S. crude output approaching pre-COVID levels, reaching an estimated 12.8 million barrels in the week leading to August 18. Notably, a substantial portion of this output, around 10 million barrels, was directed towards exports. This strategic move was perceived as U.S. producers stepping in to fill the supply gap left by the previously announced cuts in Saudi Arabia and Russia’s oil production.


U.S. Fuel Demand and Weak PMI Readings Contribute to Price Decline

Currently inventories of gasoline and distillate fuels reported significant increases in the past week, reflective of diminished demand as the summer season neared its conclusion. The impact of this trend was amplified by weak Purchasing Managers’ Index (PMI) readings from both the U.S. and the eurozone, compounding concerns about the potential adverse impact of sluggish economic growth on oil demand.


Asia’s Oil Price Decline and Lingering Concerns Over Chinese Demand

Asian oil prices experienced a marginal decline, propelled by lackluster PMI readings that intensified concerns regarding an impending slowdown in economic growth. An additional layer of apprehension was introduced by an escalation in U.S. production and exports, which hinted at the possibility of oil supply not being as constrained as initially projected.

Japan endured a third consecutive month of contracting factory activity in August. Lingering anxieties about waning Chinese crude demand further dampened market sentiment, as China, the largest global oil importer, grapples with an economic recovery hindered by the persistent effects of the COVID-19 pandemic. The cautious stance of the Chinese government in rolling out stimulus measures amplified investor uncertainty.


What we think

This combined momentum underscores the complex interplay of global supply dynamics, demand outlook, and geopolitical considerations that continue to shape the volatile oil market landscape.

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