Oil futures turned sharply lower on Wednesday, with traders attributing the move to reports that OPEC and its allies raised their global oil demand forecast for this year but Russia suggested that it’s ready to increase production above its set quotas.
Oil took a “quick, sharp drop” after some reports that the Russian Deputy Prime Minister Novak said that he expects oil demand will rise by 5.8 to 6 million barrels a day in 2021 said Phil Flynn, senior market analyst at The Price Futures Group.
But Novak also reportedly said that Russia had the ability to raise production beyond the OPEC+ limits, Flynn told MarketWatch. “The market took that as a sign that maybe Russia won’t go along with being restricted by the cartel, but I think that’s a false assumption at the same time.”
The Organization of the Petroleum Exporting Countries and its allies, a group collectively known as OPEC+, are expected to make a decision today on production going forward.
The group agreed earlier this year to unwind production cuts, boosting output in monthly increments of 400,000 barrels a day. The Biden administration subsequently pressed the group to further increase output.
“There are some rumors that Iraq might want to cause some problems at the meeting today, so it’s possible that a rubber stamp of the production increase might not go as smoothly again,” said Flynn, emphasizing that this is all “speculation.”
Market participants were also dealing with the effects of Hurricane Ida which hit the U.S. Gulf Coast last Sunday and temporarily disabled swaths of production and oil refineries in the region.
West Texas Intermediate crude for October delivery was trading $1.04, or 1.4%, lower at $67.46 a barrel, after the contract for U.S. benchmark oil fell 1% on Tuesday on the New York Mercantile Exchange.
In August, prices for the front-month contract ended 7.4% lower, the first monthly loss since March, according to Dow Jones Market Data.
Meanwhile, global benchmark November Brent crude fell 86 cents, or 1.2%, at $70.77 a barrel, following a 0.6% decline in the session before, which contributed to its monthly loss of 4.4%.
Ahead of the key meeting for major producers, crude-oil watchers aren’t expecting any major changes to OPEC+’s output plans and a number of analysts believe that even with an increase in production, oil inventories will see a drawdown this year as demand recovers from the pandemic.
“OPEC is expected to stick to the production revival plan, as even with OPEC adding 400,000 barrels each day to the end of this year, the fuel stockpiles will decline by more than 800,000 barrels in average. That’s good news for the oil bulls,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a daily research note.
That said, he cautioned that the global crude market could return to a glut by 2022 and remain that way for a year.
“So that to me is a strong hint that we don’t have much upside potential above the $70 pb in US crude, unless we see a surprise action taken by OPEC one of these days, the analyst wrote.
Meanwhile, traders continue to watch the recovery efforts for Gulf Coast refinery operations in the wake of Hurricane Ida, with an estimated that 93.69% of current oil production in region shut in, along with 94.47% of natural-gas production, according to the Bureau of Safety and Environmental Enforcement on Tuesday.
Natural-gas futures for October were trading 18.2 cents, or 4.1%, higher at $4.56 per million British thermal units, following a 1.7% gain on Tuesday.
October gasoline edged down by 2.1%, to $2.10 a gallon, following a 0.6% decline a day ago, while October heating oil shed 1.6% to $2.10 a gallon.
In inventories, U.S. crude supplies fell by about 4 million barrels for the week ended Aug. 27, according to sources, citing data from the American Petroleum Institute. The API report, however, also showed an inventory increase of 2.7 million barrels for gasoline, while distillate stockpiles fell by roughly 2 million barrels. Crude stocks at the Cushing, Okla., storage hub, meanwhile, edged up by 2.1 million barrels for the week, sources said.
The data come ahead of a more closely watched report from the Energy Information Administration due shortly and is expected to show crude inventories down by 4.4 million barrels, according to a survey of analysts conducted by S&P Global Platts.