Crude drops on renewed lockdowns, OPEC+ supply outlook

Singapore — 0253 GMT: Crude oil futures fell sharply in mid-morning trade in Asia July 14 as rising COVID-19 cases and renewed lockdowns softened demand outlook, while expectations of tapering production cuts from OPEC+ further weighed on market sentiment.

At 10:53 am Singapore time (0253 GMT), ICE Brent September crude futures were down 84 cents/b (1.97%) from the July 13 settle at $41.88/b, while the NYMEX August light sweet crude contract was 94 cents/b (2.34%) lower at $39.16/b.

Rising COVID-19 cases globally remain a key drag on market sentiments. Total worldwide infections stood at 13 million, with more than half a million death, latest data from John Hopkins University showed. California Governor Gavin Newsom, said July 13 that indoor businesses statewide such as restaurants, bars, movie theaters will be closed immediately as coronavirus cases continue to surge.

"With the California soft lockdown now framing the picture, July could be an even more challenging month for oil than expected with even more demand woes emanating from coronavirus-linked uncertainty," Stephen Innes, chief global markets analyst at AxiCorp, said in a note July 14.

Philippines, Hong Kong and Australia are among other countries that are tightening restrictions again as daily infections spike. Tedros Adhanom, director general of WHO, said July 13 that the COVID-19 pandemic is worsening globally and "there will be no return to the old normal for the foreseeable future", according to media reports.

On the supply front, investors are keeping a close eye on OPEC+ Joint Ministerial Monitoring Committee meeting on July 15, where a final recommendation will be made over extending the current 9.7 million b/d production cuts or easing into a lower 7.7 million b/d cuts in August.

"Should OPEC decide to taper its cuts, it can [still] contain supply while demand is yet to fully recover and market is still struggling with burdensome inventories," the ANZ analysts said in a note July 14.

While sources familiar with the negotiations have previously indicated that an extension is unlikely with oil prices and global demand rebounding, it remains to be seen if renewed lockdowns and the resulting uncertainty in demand will push OPEC+ to extend its current record production cuts.

Meanwhile, Iraq improved compliance to OPEC+ production cut agreement to 90% in June, while also promising to compensate for the country's overproduction in previous months and improving its compliance with supply cuts by the start of August, according to media reports.

"The most critical deliverable for OPEC+ is the continued demonstration of unity within the group. The oil market will not get too bent out of shape if OPEC tweaks production to fit macro circumstances as needed, but the group must avoid any hint of discord," Innes added.