Oil Prices Witness Volatility on OPEC’s Call to Cut Output

Crude traded around $42 a barrel on concerns about a supply glut and U.S. inventory buildup

Oil producers across the world are yet to come to terms with the depressed global oil outlook and demand for 2016, even as the International Monetary Fund (IMF) downgraded global growth rates by 10 basis points in 2016 and 20 basis points in 2017 back in July 2016, following the U.K. Brexit vote. To add to their woes, some members of the Organization of the Petroleum Exporting Countries (OPEC) have called for curtailing output aimed at bringing about a rebalance of the market where supply has consistently outpaced demand. As a reaction to these talks, oil prices witnessed volatility, jumping more than 3% on Monday, August 8th, 2016, as reported by Reuters. On Tuesday, August 9th, 2016, oil traded around $42 a barrel on concerns about a supply glut amidst forecasts for a drop in U.S. inventories.

OPEC members including Venezuela, Ecuador, and Kuwait have called for an output freeze; however, the talks are expected to fail since other key OPEC members including Saudi Arabia, Iraq, and Iran have been ramping up oil exports and battling for higher market share through discounted selling prices. Since the plunge in oil prices that began in mid-2014, Venezuela has repeatedly been involved in talks to freeze production and reduce a supply glut, but with limited success. On the other hand, Iraq has dropped the September 2016 official selling price for Basra Light crude to Asia by $1 to minus $2.30 a barrel against the average of Oman/Dubai quotes from the previous month, as per Reuters. Russia, the world’s biggest oil producer, has expressed dissent on the new production freeze plan. Given this precarious situation, an informal meeting of OPEC member countries is scheduled to take place on the sidelines of the International Energy Forum in Algeria from September 26-28th, 2016.O1

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $42.68 per barrel, up 0.21% from their last close on August 9th, 2016. Brent futures LCOc1 were trading at $44.96 per barrel, up 0.04% on the same day.O2

U.S. rig counts reach highest levels

Meanwhile, a glut of crude and refined products is looming over the market mainly due to two important factors: increased oil drilling and higher crude inventory in the U.S. as well as strengthening fuel exports by China.

Data show that rigs operating in the U.S. are the highest since March 2016, at 381, rising for a sixth week in a row. Data released on August 3rd, 2016, by the U.S. Energy Information Administration for the week ended July 29th, 2016, shows that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.4 million barrels from the previous week. At 522.5 million barrels, U.S. crude oil inventories are at historically high levels for this time of year.

Recent data also show a buildup of more than 307,000 barrels at the Cushing, Oklahoma, delivery hub for U.S. crude futures in the week to August 5th, 2016. Cushing inventory rise of over 200,000 barrels is typically bearish for crude. Total U.S. crude inventories were expected to fall by one million barrels as per government data.

In China, net oil-product exports surged to a record high of 2.49 million tons in July 2016, after smaller oil plants received approval for the first time to buy crude directly from the global market. Moreover, weaker freight rates make it more profitable for Chinese importers to ship fuel from abroad, according to China’s Customs General Administration.

The combination of these factors has led analysts to predict a decline in oil prices before any sustained recovery in the near term.

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