Oil futures climbed on Tuesday to log their highest settlement in about three months, supported by reports that major crude producers may agree to extend output cuts scheduled to taper at the end of June.
The Organization of the Petroleum Exporting Countries and, notably, major producer Russia, part of a group known as OPEC+, are now expected to extend their output cuts of 9.7 million barrels per day, “provided Russia agrees,” said Fawad Razaqzada, market analyst with ThinkMarkets. “Apparently, Saudi Arabia has been leading talks to push for extending the cuts.”
OPEC+ was nearing an agreement to extend collective production cuts through Sept. 1, and planned to discuss output curbs during a meeting via conference call on Thursday, The Wall Street Journal reported Monday , citing comments from delegates. Thursday’s call would bring forward a meeting that the OPEC website still has scheduled for June 9-10.
“If it is two or more months of extensions, then crude prices could add to their gains, with Brent oil likely to climb to $40-$45 per barrel,” said Razaqzada, in a Tuesday note. “However, a one-month extension may not cause too much of a positive response as that will likely disappoint expectations.”
“In any case, the OPEC+ will have follow-through on their commitment to cut output in order to sustain higher prices. If some members don’t comply to the cuts, then oil prices may come under renewed selling pressure soon,” he said.
West Texas Intermediate crude for July delivery /zigman2/quotes/211629951/delayed CL.1 -0.12% gained $1.37, or 3.9%, to settle at $36.81 a barrel on the New York Mercantile Exchange.
Global benchmark Brent saw its August contract climb $1.25, or 3.3%, at $39.57 a barrel on the ICE Futures Europe platform, after touching an intraday high of $39.567.
WTI and Brent crude both marked the highest settlements for front-month contracts since March 6, according to Dow Jones Market Data.
Already, there is evidence that OPEC+ production cuts that began in May have been effective, with Russian output falling to 9.39 million barrels a day last month, near the OPEC+ goal, Reuters reported , citing a report from Interfax news agency. Russia’s output was down from 11.35 million barrels per day in April, the news organization reported, citing sources familiar with the matter.
“An extension of the current cut levels will definitely be a further boost for the market. Not only will the market rebalance, but stock builds of oil will also feel some relief,” wrote Bjornar Tonhaugen, Rystad Energy’s head of oil markets, in a note.
“Prices rise on this prospect and are set for higher levels if the cuts are indeed extended,” he said. “OPEC+ cuts are clearly working with solid help from recovering crude oil demand, especially in Asia.”
The crude market also has been bolstered by hope that business reopenings across the world from the COVID-19 pandemic could help to drive demand for oil and other crude byproducts.
Investors, however, have focused on strained relations between the U.S. and China with Bloomberg News and Reuters reporting on Monday that Beijing has halted some imports of U.S. soybeans, potentially adding to Sino-American friction, which could add pressure on crude prices if it results in an erosion of the hard-won, phase-one trade agreement. Bloomberg on Tuesday reported that some soybean sales were still going through .
“While supply cuts can help clear the stockpiles and support the prices, the mid-to-long term recovery depends upon significant factors including the consumer confidence, vaccine development (to prevent a second peak), the trade tensions between the U.S. and China and, in a way, the U.S. elections,” said Mihir Kapadia, chief executive officer of Sun Global Investments.
“Global trade has been hurt by political factors the last three years, and unless significant change happens this end of the year, protectionism will only escalate and disrupt everything from supply chains to regional demand,” he said in emailed commentary.
Back on Nymex, prices for petroleum products also rose, with July gasoline up a fourth straight session, with a 4.8% gain to $1.1183 a gallon and July heating oil up 6.1% at $1.0921 a gallon, for the highest front-month contract finish since March 25.
July natural gas finished at $1.777 per million British thermal units, up 0.2%.
Weekly data on U.S. petroleum supplies will be released by the American Petroleum Institute late Tuesday and by the Energy Information Administration early Wednesday.
On average, analysts polled by S&P Global Platts expect the EIA to report an increase of 3.5 million barrels for the week ended May 29. They also forecast a decline of 300,000 barrels in gasoline stockpiles and a rise of 2.8 million barrels for distillates, which include heating oil.