OPEC + slows supply as GDP growth recovers

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GROSS OIL PRICE FORECAST: OPEC + SUPPLY INCREASE ON TAP AS GLOBAL ECONOMIC ACTIVITY REBATES IMPLOSION ON GDP GROWTH IN Q2

  • Crude oil prices soared along with risky assets as market sentiment and economic activity rebound after coronavirus lockdown
  • Saudi Arabia and Russia solidified deal to begin unwinding historic OPEC + supply cuts as global oil demand recedes
  • 2Q-2020 GDP growth rates driven by several advanced economies next week amid high-profile equity earnings reports and an FOMC decision

Crude oil price action has staged a monumental rally since proceeds tcrossed out in negative territory last April. Much of the rally in oil prices in recent weeks has been driven by two fundamental bullish drivers: an OPEC + deal to reduce supply, combined with a welcome rebound in global energy consumption.

WTI FUTURE CRUDE OIL PRICES: DECEMBER 2019 – JULY 2020 (CHART 1)

Graphic created by @RichDvorakFX with TradingView

WTI crude oil is currently fluctuating around $ 41.00 per barrel as measured by the month one futures contract, but the lead has started to slow and oil’s performance is still down about 32% since the start of the year. January. Overall, the drop in crude oil prices is the result of a huge 9% drop in global oil demand forecast this year due to a sudden halt in economic activity amid the coronavirus lockdown.

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This mainly contributed to a supply-demand imbalance of 9.8 million barrels per day recorded by OPEC for 2Q-2020. Looking ahead, however, the major oil producer cartel has optimistic projections for a recovery in global oil demand in the second half of 2020 and into 2021. The IEA and EIA forecast an increase in demand for oil. global oil demand in the coming months as well, according to their respective monthly oil reports.

OPEC AND THE ALLIES TAKEN FOR CURTAIL CUT PRODUCTION DURING DEMAND RECOVERY (TABLE 2)

Crude Oil Graph Recovering the V-Shape of OPEC's Global Oil Demand

Source of the graph: OPEC Monthly Oil Market Report

Growing demand for crude oil prompted OPEC and its allies to start reversing production cuts announced earlier this year that were aimed at absorbing excess market supply. This was indicated by OPEC + delegates who backed a solidified deal by Saudi Arabia and Russia to increase the group’s crude oil production by 2 million barrels per day starting next month.

Learn more – Global Commodities: Worldwide Commodity Imports & Exports (outil interactif)

This decision should make it possible to reduce OPEC + production from 9.7 million barrels per day to 7.7 million barrels per day net. As such, a downside risk to crude oil price action emerges, with OPEC + ready to reverse previous supply cuts and ease oversight on permanent production quotas. Another notable headwind looming over the direction of crude oil includes the potential for the V-shaped recovery in global GDP growth to slow down as the “high liquidity” of unprecedented monetary and fiscal stimulus s ‘fade.

GLOBAL ECONOMIES DUE TO REPORTING A CURRENT REDUCTION IN THE RATE OF GDP GROWTH (GRAPH 3)

Crude Oil Price Table Forecast 2Q-2020 GDP Growth Report Coronavirus Lockdown

Source of the graph: DailyFX Economic Calendar

On that note, market players can focus on the second quarter Publication of GDP data due next week given the high probability of volatility as this high impact economic indicator crosses the thread. Despite the retrospective nature of quarterly GDP reports, they can catalyze changes in the sentiment of traders, especially if actual numbers differ significantly from forecasts. To this end, the GDP growth rates of the United States and the euro area could attract significant attention. This shows that the United States and the EU are two of the largest economies and consumers of crude oil in the world.

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Likewise, a surge of earnings expected next week, not to mention the potential for coronavirus vaccine news, could also cause fluctuations in risk appetite and crude oil price action. Two additional fundamental themes that conservative traders might want to keep an eye out for are: increase in unemployment claims and escalation of Chinese tensions, which could push crude oil prices down if these bearish headwinds gain ground and fuel risk aversion.

Learn more – How to trade oil: strategies and tips on trading crude oil

– Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for a real-time market snapshot

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