Oil climbs above $40 for the first time in 3 months on hopes of extended production cuts

Lev Fedoseyev via Getty
  • Oil rose past $US40 per barrel on Wednesday, three months after oil prices plunged over 30% at the worst level since the Second Gulf War.
  • In early European trading, Brent crude rose to $US40.12 a barrel amid reports that OPEC+ members are favouring extension of production cuts currently set to end in June.
  • The cartel could meet to discuss those cuts as early as Thursday, Reuters reported.
  • OPEC’s leading member, Saudi Arabia, is reportedly eyeing an extension of one to three months.
  • “The oil market seems to be following the stock market optimism that for now has been unbreakable despite a looming China risk and rising social unrest in the US,” said Edward Moya, a market analyst at OANDA.
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Oil rose on Wednesday on reports that Russia and several other OPEC+ members signalled an inclination for an extension of production cuts by one month.

Oil’s international benchmark, Brent crude, rose 2.1% to $US40.12 in early European trading. US benchmark West Texas Intermediate rose 1.6% to $US37.41 a barrel.

The world’s biggest oil producers are expected to meet as early as Thursday, according to Reuters which cited sources as saying OPEC+ members may bring forward a meeting originally scheduled for June 9-10.

While Russia and other members are eyeing one-month extensions to production cuts, Saudi Arabia is reportedly in favour of as long as three months more cuts.

“Energy markets were not entirely confident that Russia would play ball for another month, so oil prices had a little room to climb higher,” Edward Moya, senior market analyst at OANDA, said Tuesday as prices moved towards $US40.

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“The oil market seems to be following the stock market optimism that for now has been unbreakable despite a looming China risk and rising social unrest in the US,” he said in a note.

Global economic recovery has fuelled the improvement in the outlook for crude demand, but soon enough, rising trade tensions, curfews across the US, and permanent labour destruction will dampen the outlook, he said.

While crude demand improves, WTI is still facing “huge resistance” from the gap that grew out of the Saudi-Russia price war.

In April, the US benchmark oil price plunged to a historic low of almost -$US40 per barrel as demand evaporated during the COVID-19 outbreak, and futures contracts expired, forcing traders to sell at a loss to avoid having to take physical delivery of oil.

Brent also plunged, dropping to lows not seen since the Second Gulf War in 2003, falling to just above $US20 per barrel.

For WTI to regain demand levels and break out higher, either the oil market will have to rebalance, or demand outlook should weigh major breakthroughs in finding a vaccine for COVID-19, and for US-China to play nice, Moya said.

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