OPEC + slows supply reduction as GDP growth recovers

CRUDE OIL PRICE FORECAST: OPEC INCREASE + TAP SUPPLY AS GLOBAL ECONOMIC ACTIVITY REBOUNDS FROM IMPLOSION OF GDP GROWTH Q2

• Crude oil prices have risen with risky assets as market sentiment and economic activity rebound from the coronavirus blockade
• Saudi Arabia and Russia solidified an agreement to begin undoing historic OPEC + supply cuts as global oil demand recedes
• 2Q-2020 GDP growth rates are due to several advanced economies next week amid high-profile capital gains reports and a FOMC decision

Crude oil price action has undergone a monumental recovery since output traded in negative territory last April. The recovery in oil prices in recent weeks is largely due to two major bullish drivers: an OPEC + deal to cut supplies combined with a welcome rebound in global energy consumption.

WTI RAW OIL FUTURE PRICE: DECEMBER 2019 – JULY 2020 (FIGURE 1)

Graphic created by @RichDvorakFX with TradingView

WTI crude oil currently fluctuates around $ 41.00 per barrel as measured by the first month’s futures contract, but progress has begun to stagnate, and oil yield has still declined approximately 32% since early January. In general terms, the lowest oil prices come from a 9% drop in world oil demand that is expected this year due to a slowdown in economic activity amid the coronavirus blockade.

This has mainly contributed to an imbalance between supply and demand of 9.8 million barrels per day, established by OPEC for 2Q-2020. Looking ahead, however, the cartel of major oil producers has optimistic projections for global oil demand to recover during the second half of 2020 and through 2021. Both the IEA and EIA anticipate that global demand for Oil will increase in the coming months and according to their respective monthly oil reports.

OPEC AND PARTNERS WILL ESTABLISH SHORT PRODUCTION CUTS AMONG RECOVERY OF DEMAND (FIGURE 2)

Chart Source: OPEC monthly oil market report

Growing demand for crude oil has lured OPEC and its allies to begin reversing production cuts announced earlier this year that were aimed at absorbing excess supply from the market. This was indicated by OPEC + delegates who backed a deal solidified by Saudi Arabia and Russia to increase the group’s crude oil production by 2 million barrels per day starting next month.

Learn more – Global Commodities: World Commodity Imports and Exports (interactive tool)

The measure seeks to alleviate OPEC + production cuts from 9.7 million barrels per day to 7.7 million barrels per day on the network. As such, a bearish risk arises that confronts the action of the price of crude oil with OPEC + configured to reduce previous supply cuts and relax the supervision of permanent production quotas. Another notable headwind looming in the direction of crude oil includes the potential for the V-shaped recovery in global GDP growth to decline as the unprecedented ‘high liquidity’ of fiscal and monetary stimulus measures disappears.

GLOBAL ECONOMIES SHOULD REPORT THE STAGING OF THE DECREASE IN THE GDP GROWTH RATE (FIGURE 3)

Chart Source: DailyFX Economic Calendar

In that sense, market participants can focus on the second quarter GDP data releases expires next week taking into account the high probability of volatility, as this typically high impact economic indicator crosses the wire. Despite the retrospective nature of quarterly GDP reports, they can catalyze changes in trader sentiment, particularly if real numbers differ materially from expectations. To that end, the growth rates of GDP in the United States and the Eurozone could attract considerable attention. This shows that the United States and the EU are two of the world’s largest economies and consumers of crude oil.

Similarly, a swarm of capital gains expected next week, not to mention the potential of the news about the coronavirus vaccine, could cause fluctuations in risk appetite and crude oil price action as well. The two additional fundamental issues that prudent traders may want to consider include growing unemployment claims and escalation of tensions in china, which could cause oil prices to drop if these adverse downward winds gain traction and aversion to fuel risk.

Learn more – How to Trade Oil: Strategies and Tips for Trading Crude Oil

— Written by Rich Dvorak, Analyst DailyFX.com

Connect with @RichDvorakFX on Twitter to know the market in real time