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Oil Under Pressure as Demand Uncertainty Persists

Oil futures fell Thursday, taking a cue from a decline in global equities, after holding their own a day earlier following a decision by the Organization of the Petroleum Exporting Countries and its allies to begin trimming production cuts next month.

“With the OPEC+ decision behind us, oil futures are continuing to trade with a high degree of correlation to the equity markets as the biggest threat to risk assets here, including oil, is another wave of economic shutdowns due to the latest resurgence in the COVID-19 outbreak,” said Tyler Richey, co-editor at Sevens Report Research. “Case in point, oil rallied on the positive vaccine headlines earlier this week but pulled back with global stocks after disappointing retail sales data from China overnight.”

China’s retail sales fell 1.8% year-over-year in June, according to The Wall Street Journal, though its economy grew 3.2% in the second quarter from a year earlier.

The supply dynamics of the oil market are “pretty stable right now,” Richey told MarketWatch. “However the demand input to the oil economics equation is where the unknowns lie.”

”If the spike in COVID-19 cases threatens the global economic reopening/normalization process, then we expect a pullback in oil,” he said. “Conversely, if everything remains on track and growth continues to rebound relatively swiftly as we have seen in recent months, then a demand-driven rally in WTI” back towards the $50 a]barrel level will become increasingly likely.

West Texas Intermediate crude for August delivery on the New York Mercantile Exchange was down 22 cents, or 0.5%, at $40.98 a barrel, while September Brent crude, the global benchmark, was off 12 cents, or 0.3%, at $43.67 a barrel on ICE Futures Europe.

Oil ended at a more than four-month high Wednesday after the OPEC+ alliance agreed to allow record production cuts of 9.7 million barrels per day to decrease to 7.7 million barrels per day starting August, in line with a previous OPEC+ agreement to gradually taper the reductions.

However, at the same time, countries that failed to abide by their quota limits since the latest pact began in May are required to cut output even more in August to compensate for their overproduction.

“Though OPEC+ appears to have the market under control at present, some questions do remain: will production discipline be maintained at a high level? Will the stragglers actually implement their promised cuts? How quickly will the cartel be able to react if the demand outlook worsens again? After all, no matter which way one looks at it, a Brent price of below $45 per barrel is anything but good news for OPEC,” said Eugen Weinberg, analyst at Commerzbank, in a note.

Meanwhile, global equities were under pressure as tensions continue to rise between the U.S. and China.

The Trump administration is weighing a ban that would prevent members of the Chinese Communist Party and their families from traveling to the U.S. The Trump administration said Wednesday that it would ban travel for employees of Chinese technology group Huawei and other companies it deems complicit in helping Beijing crack down on human rights. China recently imposed travel restrictions on some U.S. officials, including Senators. Marco Rubio and Ted Cruz.

The U.S. – China tensions appeared to take precedence over upbeat economic data that saw China’s second-quarter gross domestic product expand 3.2% from a year ago, beating an analyst consensus estimate of 2%, and marking a bounce after a 6.8% rout in the first quarter. Analysts said an unexpected fall in Chinese retail sales also dented sentiment for assets perceived as risky.

In other Nymex trading, the August gasoline contract lost 1.5% to $1.2452 a gallon and August heating oil shed 1.3% to $1.2287 a gallon.

Natural-gas futures edged up after the U.S. Energy Information Administration reported Thursday that domestic supplies of natural gas rose by 45 billion cubic feet for the week ended July 10. That was smaller with the average increase of 50 billion forecast by analysts polled by S&P Global Platts.

August natural gas traded at $1.795 per million British thermal units, up 1%, following a gain of 1.8% on Wednesday. 

Source: Marketwatch