Crude Oil Fundamental Outlook: Neutral
- Crude oil prices awaiting OPEC+ weekend meeting
- Output curb extension, rising demand may boost oil
- Uncertainties are US-China tensions, Brexit, stocks
Sentiment-linked crude oil prices are awaiting Saturday’s meeting between the Organization of the Petroleum Exporting Countries (OPEC) and key allies. Also known as OPEC+, the event will be closely watched as investors anticipate the fate of what has been record crude oil production cuts – see chart below. This past week, doubts over the gathering temporarily left the commodity in limbo.
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This is because Saudi Arabia and Russia expressed hesitation to prolong output curbs due to concerns about compliance from other participating members such as Iraq. But later on in the week, the latter told the OPEC+ group that it will ‘fully implement’ production cuts by the end of next month. This resulted in Russia and Saudi Arabia securing a tentative deal that could result in extending output curbs until the end of July.
For crude oil prices, this could be a welcome sign as both supply and demand could continue working to support the commodity. On the next chart below, implied demand calculated using data from the Department of Energy (DOE) shows that the need for oil has been rising since the middle of April. This has been in line with states working to gradually ease lockdown measures enforced due to the coronavirus outbreak.
Meanwhile in China – the world’s second-largest economy – oil demand is said to be back to amounts last seen prior to the country enforcing a national lockdown. The world’s largest economies – which are the US and China – are also coincidentally the biggest consumers of energy. Absent a material roadblock, the supply and demand forces discussed could work to boost oil in the near term.
The uncertainties are still plenty however. The commodity can often follow the trends in risk appetite. Oil has been rising alongside gains in the Dow Jones, S&P 500 and Nasdaq Composite. Tensions between the US and China could brew over Hong Kong. There may also be no extension to the Brexit transition period. Riots and protests in the US likely raise the risk of a second coronavirus wave. If global stocks fall, oil may follow.
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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter