Apparent unity of OPEC+ and US inventory data elevate the moods in the markets


Crude oil inventory draw - EIA and API

Crude oil price rose modestly leaving behind the inexplicable fluctuations that we witnessed in the last few days.

The markets breathed a sigh of relief when OPEC+ announced that it will ease the production cuts gradually on Wednesday. What was remarkable is the fact that the time it took for the ministers of the OPEC+ to coming to an agreement in unison.

The ministerial meeting, known as the JMMC, unlike the previous meeting that ended in acrimony over the baseline disputes, ended in just 23 minutes. The apparent unity of the OPEC+ also a key factor in lifting the clouds of gloom that had been hovering over the crude oil markets for weeks.

Some investors were still anxious yesterday, though. A day before the ministerial meeting, the JTC, Joint Technical Committee of the OPEC+, depicted a picture of a surplus in the crude oil markets in 2022, in the event of production cuts being reversed.

Analysts, however, started taking into account two key indicators about the market conditions that showed encouraging signs about the demand.

Both API, American Petroleum Institute, and the EIA, US Energy Information Administration, released the US inventory data showing a substantial drop in the US crude oil stocks, defying the initial market estimates: the figures were 4.045 million barrels and 7.2 million barrels respectively.

That means the demand of crude oil by the US consumers has not been hampered by the new outbreaks of the Delta variant of the Coronavirus. On the contrary, the demand has gone up despite the refinery closures along Gulf Coast due to the Hurricane Ida – and panic across the southern states of the US over the impact on multiple fronts.

Since the global outbreaks of the Coronavirus show no sign of a let-up, the demand of crude oil may suffer to some extent in the rest of the world, though.

In Asia the situation is still acute. In addition, even countries that we thought kept the pandemic at bay by strict lockdown measures, coupled with accelerated vaccine drives, are waking up to new reality; it’s easier said than done.

Israel, New Zealand and Australia, for instance, are battling extraordinary outbreaks across the respective countries.

On a positive note, China, the world’s second largest consumer, appeared to have contained the outbreaks. It, however, admitted that its economy, the world’s second largest, has slowed down in recent months.

The pandemic in India, the world’s third largest importer of crude oil, meanwhile, is still a cause for serious concern. In some states, the rate of infection has gone up considerably in the last few weeks.

Of course, a surplus of oil in the markets will be a disaster for the producers. At the same time, a price far above what is at present in the current global economic circumstances may not be sustainable in the long run.

Then, the oil producers will come under immense pressure to ease the burden off the consumers. The key importers, as a last resort, may even turn to their SPRs, the Strategic Oil Reserves, to deal with the challenge of rising oil prices – at least in the short run – which in turn could buckle the market-trends - the only outcome of which is just unnecessary chaos.

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