OPEC+ Curbs Supply Cut as GDP Growth Curtails

CRUDE OIL PRICE FORECAST: OPEC+ SUPPLY INCREASE ON TAP AS GLOBAL ECONOMIC ACTIVITY REBOUND SLOWS FROM Q2 GDP GROWTH IMPLOSION

  • Crude oil prices have climbed with risk assets as market sentiment and economic activity rebound from the coronavirus lockdown
  • Saudi Arabia and Russia solidified an agreement to begin unwinding historic OPEC+ supply cuts as world oil demand snaps back
  • 2Q-2020 GDP growth rates from advanced economies detailed record-setting downturns and Fed Chair Powell just hinted the recovery has stalled

Crude oil price action has staged a monumental recovery since the commodity traded in negative territory this past April. The rally in oil prices over recent weeks looks largely on the back of two bullish fundamental drivers: an OPEC+ deal to slash supply combined with a welcomed rebound in global energy consumption.

WTI CRUDE OIL FUTURES PRICE: DECEMBER 2019 – JULY 2020 (CHART 1)

Chart created by @RichDvorakFX with TradingView

WTI crude oil currently fluctuates around $40.00 per barrel measured by the front-month futures contract, but the advance has started to stall, and petroleum performance is still down about 34% since the start of January. Broadly speaking, lower crude oil prices stem from a whopping 9% plunge in world oil demand expected this year due to a screeching halt in economic activity amid the coronavirus lockdown.

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This has primarily contributed to a supply-demand imbalance of 9.8-million barrels per day penciled in by OPEC for 2Q-2020. Looking forward, however, the cartel of major oil producers have optimistic projections for world oil demand to recover during the second half of 2020 and into 2021. Both the IEA and EIA anticipate global oil demand to increase in the months ahead as well according to their respective monthly oil reports.

OPEC & ALLIES SET TO CURTAIL PRODUCTION CUTS AMID EXPECTED DEMAND RECOVERY (CHART 2)

Crude Oil Price Chart OPEC Global Oil Demand Outlook

Chart Source: OPEC Monthly Oil Market Report

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

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The move looks to ease OPEC+ production cuts from 9.7-million barrels per day to 7.7-million barrels per day on net. As such, a bearish risk facing crude oil price action emerges with OPEC+ set to unwind prior supply cuts and relax oversight of standing output quotas. Another notable headwind looming over the direction of crude oil includes potential for the v-shaped recovery in global GDP growth to abate as the ‘liquidity high’ from unprecedented monetary and fiscal stimulus measures wears off.

GLOBAL ECONOMIES REPORT STAGGERINGQ2 GDP GROWTH RATE DECLINES (CHART 3)

GDP Growth Rate United States Germany 2Q 2020

Chart Source: DailyFX Economic Calendar

To that end, GDP growth rates out of the United States and Eurozone, who are two of the world’s biggest economies and consumers of crude oil, are showing historic contractions for 2Q-2020. Economic activity has undoubtedly improved since the second quarter trough when the global economy was paralyzed during the coronavirus lockdown, but there is mounting evidence that pent-up demand has sputtered out, which leaves crude oil prices hanging in jeopardy.

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Odds of this threat garnering further credence was just hinted at by Jerome Powell, Chair of the Federal Reserve, who stated during yesterday’s FOMC decision press conference how leading economic indicators and high-frequency data since June point to the recovery losing momentum. Two additional fundamental themes prudent traders may want to keep tabs on include rising jobless claims and escalating china tensions, which might steer crude oil prices lower if these bearish headwinds gain traction as well.

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— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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