Crude steadies after overnight gains on lower US inventories, OPEC+ cut easing

Singapore — 0250 GMT: Crude oil futures were steady to lower in mid-morning trade in Asia July 16 after a sharp drop in US crude inventories supported prices overnight, even as OPEC+ agreed to ease production cuts from August.

At 10:50 am Singapore time (0250 GMT), ICE Brent September crude futures were down 27 cents/b (0.62%) from the July 15 settle at $43.52/b, while the NYMEX August light sweet crude contract was down 33 cents/b (0.80%) at $40.87/b.

US commercial crude inventories plunged 7.5 million barrels to 531.7 million barrels for the week ended July 10, outpacing the 2.1 million-barrel drop expected by analysts and narrowing the surplus to the five-year average to 16.6%, US Energy Information Administration data released July 15 showed.

US gasoline stocks fell 3.1 million barrels over the same period to 248.5 million barrels, while distillate fuel oil stocks fell 453, 000 barrels to 176.8 million barrels. Total product supplied for distillate fuel oil, a proxy for demand, jumped 22% to 3.69 million b/d in the week, and was 3.6% stronger than in the same period a year earlier, marking the first time demand has exceeded year-ago levels since the week ended April 3.

"Oil prices rose more than 2% on Wednesday, supported by a sharp drop in US crude inventories, but further gains were limited as OPEC and its allies are set to ease supply curbs from August as the global economy gradually recovers from the COVID-19 pandemic," UOB analysts said in a note July 16.

The 23-country OPEC+ coalition agreed to taper production cuts from the current 9.7 million b/d to 7.7 million b/d from August at a Joint Ministerial Monitoring Committee July 15. The alliance said it was confident that recovering global demand will soak up additional supply, aided by seasonal consumption in many OPEC countries in the Middle East where peak power generation for air conditioning is largely fueled by oil.

Saudi energy minister Prince Abdulaziz bin Salman noted the cuts would actually be larger than 7.7 million b/d since countries that exceeded their quotas in May and June by a combined 840, 000 b/d have agreed to make extra compensation cuts in the third quarter. This indicates that only about 1.15 million b/d of production will be added, 43% less than the 2 million b/d headline figure, according to an analyst report.

"It will be a disappointment to some that the 9.7 million b/d reduction has not been extended again. Still, it is ultimately supportive for oil that the OPEC+ agreement seems to be working well, and even more important is that OPEC compliance is on the unified front," AxiCorp chief global markets analyst Stephen Innes said in a note July 16.

In another positive sign for demand, China's gross domestic product expanded 3.2% year on year in Q2, and rebounded from a sharp 6.8% contraction in Q1, official data released July 16 showed.

"China's Q2 GDP growth beat consensus expectation, which is unambiguously positive for risk sentiment. But it [is] what's under the hood that matters most [for] China's economic data," Innes said, in a reference to the 4.8% year-on-year growth in China's industrial production while retail sales were down 1.8%. He noted that the coronavirus pandemic was likely to continue weighing on consumer demand regardless of the fiscal stimulus provided and a gradual pickup would occur only once consumers "feel confident the landscape is virus-free."