OPEC Extends Production Cuts through July

Just three short weeks ago, headlines were celebrating crude oil’s ascent above $30/bbl. Today, WTI crude briefly surpassed $40/bbl – a 33% price gain in a short period. As we reported last Friday, the EIA projected in May that oil would not return to $40/bbl until April 2021. A number of supportive economic and oil market trends are expected to provide buoyancy to the market this week.

First, the OPEC+ group voted this weekend to officially extend 9.7 MMbpd production cuts through the end of July. In April, the alliance reinstated its production cuts, which had lapsed due to a disagreement between Russia and Saudi Arabia. Steep cuts of 9.7 MMbpd lasted until the end of June, tapering down to 7.7 MMbpd in July. This latest agreement equates to 2 MMbpd less supply for the month, or 62 million barrels of crude oil being removed from global inventories.

Some see OPEC’s new tapered approach as a shift in market management approach. In the past, OPEC’s primary focus has been on inventory levels, but now the group is seemingly taking a more active role in managing the entire future price curve. The group prefers immediate prices to remain higher than future-dated oil prices, a structure known as backwardation. Backwardated markets incentivize declining inventory levels, further boosting near-term oil prices.

In addition to OPEC support, positive economic trends are giving the market confidence to move higher. Job data reveals that May brought 2.5 million jobs back in the US, setting a record for job growth. The news comes after last week’s report that personal income surged 10.5% thanks to unemployment payments and stimulus checks. The Nasdaq even closed at record highs, erasing the losses seen over the past few months. With supplies managed by OPEC and demand returning steadily, markets are gaining confidence that oil prices could perform strongly for the remainder of the year.

Following early morning gains, oil prices are turning lower as markets pull back from their huge rally. WTI crude is trading at $39.08 this morning, down 47 cents (-1.2%) from Friday’s closing price.

Fuel prices are trading laterally this morning on quiet news. Diesel prices are $1.1480, relatively unchanged with 0.3 cents losses. Gasoline prices are trading at $1.2234, up a penny since Friday.