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Oil Prices Drop Even After OPEC Promises To Cut Output To 7.7 Million Bpd BY August

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  • Oil prices ease on global production cuts
  • OPEC to cut output to 7.7 million bpd by August
  • Morgan Stanley expect oil prices volatility to continue

On Thursday, oil prices eased following OPEC’s agreement and its allies like Russia to taper production cuts from August. However, the drop was moderated by demand recovery in the US, which still remains fragile and will unlikely test pre-pandemic levels until late next year.

Oil prices drop on OPEC production cuts

Time                      : 07-16-2020

Pivot                     : $40.73

Technical View     : Long above $40.93

Targets                 : $41.12 – $41.54 – $41.95 – $42.61

Comments           : Sideways

Last Price             : $43.52

Technical View     : Short below $40.53

Targets                 : $40.33 – $40.07 – $39.51 – 39.01

Brent crude dropped 0.8% to $43.46 while US benchmark WTI crude dropped 1% to $40.78. This came after OPEC members agreed to scale back production cuts as demand for oil slowly recovers. Since May OPEC has been cutting production by 9.7 million bpd, but from August they will taper to 7.7 million bpd.

Oil demand expected to recover by next year

According to Saudi Arabia’s oil minister Abdulaziz bin Salman, the output cuts will exceed the set 7.7 million bpd in August due to the mandatory reductions from producers that have overproduced at the start of OPEC’s 2-year phased agreement. Abdulaziz indicated that the transition will not be felt in international markets because OPEC members will use most of the additional volume domestically.

OPEC expects oil producers that had not enforced the earlier cuts to slash their production by 400,000 bpd. They will be required to maintain those cuts until the end of October. According to OPEC, global oil demand is expected to rise by close to 7 million bpd in 2021 following a prediction of 8.9 million bpd drop in 2020.

Morgan Stanley expects volatility in oil prices to continue as demand remains suppressed from pre-pandemic levels. Currently, 12-month WTI is around $42 per barrel, and US E&P could lock prices that significant shale volumes can be produced again when drilling recommences.

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