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Brent crude flirts with $40/b on growing OPEC+ optimism

Highlights

Front-month NYMEX WTI settles highest since March 6

OPEC+ debates extending 9.7 million b/d cuts to July or later

Potential June 4 OPEC+ meeting date still not finalized

Houston — Front-month ICE Brent flirted with approaching $40/b on a bullish day for crude oil as optimism picked up that the OPEC+ group would decide to extend its deeper production cuts at least through July.

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Despite ongoing debate over whether to extend the 9.7 million b/d in crude cuts by as much as three months -- as hoped for by Saudi Arabia -- Russia has indicated it supports at least extending the reductions by one month through July in order to avoid more oil barrels coming online after June.

And those signals coming from Russia helped relieve some of the doubt that remained in energy markets, analysts said. The existing OPEC+ deal would scale back the reductions to 7.7 million b/d from July through December. OPEC+ may agree to extend the deeper cuts as soon as a June 4 online meeting.

However, the meeting still is not formally scheduled, leaving some lingering questions as the nations' energy ministers hammer out some of the details behind the scenes.

Front-month NYMEX July WTI jumped 4% and settled June 2 up $1.37/b at $36.81. July ICE Brent rose by $1.25/b to $39.57/b, but never hit the $40 threshold during trading.

"All the signals we're seeing from Riyadh and Moscow suggest they're ready to keep deeper cuts in place for longer," said Matt Reed, vice president of Foreign Reports, which focuses on Mideast oil politics. "The question is how long. They haven't decided yet, but a short-term extension should be uncontroversial and easy to reach."

Bjornar Tonhaugen, Rystad Energy's head of oil markets, said the OPEC+ cuts are clearly working thus far and helping to alleviate the oversupplied global crude inventories that rapidly built up during the coronavirus pandemic.

"An extension of the current cut levels will definitely be a further boost for the market," Tonhaugen said. "Not only will the market rebalance, but stock builds of oil will also feel some relief. Prices rise on this prospect and are set for higher levels if the cuts are indeed extended."

Tonhaugen said even a one-month extension of the deeper cuts could help draw an additional 4 million barrels of crude per month in July and August.

As for refined products, NYMEX July RBOB was up 5.16 cents/gal to $1.1183/gal and July ULSD gained 6.31 cents/gal to $1.0921/gal.

LOOKING FORWARD

Despite Brent crude nearing $40/b and WTI rising above $36/b, there are still longer-term concerns regarding the pandemic, the remaining crude supply-and-demand imbalance, and escalating tensions between the US and China over trade and Hong Kong.

"The oil market seems to be following the stock market optimism that for now has been unbreakable despite a looming China risk and rising social unrest in the US," said Edward Moya, senior market analyst at OANDA. "The global economic recovery has done wonders for an improving crude demand outlook but sooner than later, escalating trade tensions, curfews across the nation, and permanent labor destruction will dampen the outlook."

And there remains the question of how quickly US producers will reverse well shut-ins after the industry took about 1.7 million b/d off the market.

"In order for WTI to break out higher, the oil market will need to find balance," Moya said, "or the demand outlook needs to find some major breakthroughs in finding a treatment/vaccine for COVID-19 and for China and the US to play nice."