As Oil Prices Slips by 1.2% Will OPEC+ Evade ‘Taper Tantrum’

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  • Oil prices dropped on Monday on a record daily rise in global coronavirus cases with big spikes in infections over the weekend in the United States.
  • While traders await an OPEC technical meeting expected to recommend an easing of supply cuts.
  • Brent crude fell 53 cents, or 1.2%, to $42.71 a barrel by 0946 GMT, though prices have been hovering around $42 for a couple of weeks.
  • U.S. crude was down 64 cents, or 1.6%, at $39.91.
  • Oil traders also remained on edge as the Joint Ministerial Monitoring Committee (JMMC) of the Organization of the Petroleum Exporting Countries (OPEC) prepares to meet on Tuesday and Wednesday to recommend levels for future supply cuts.
  • The challenge now confronting the oil producers’ club is one that’s all too familiar to the Fed: how to avoid a “taper tantrum,” the market panic that ensued when the institution proposed tightening monetary policy in 2013.

A recently published article in Reuters deals with the tough times the oil industry passes through as prices dropped to a record low due to the rising global coronavirus cases.

Pricing pressures

“Pricing pressures are locked in a holding pattern and will remain so until the coronavirus pandemic is brought under control. Until then, there will continue to be a lack of conviction in upside potential,” said Stephen Brennock of oil broker PVM.

The World Health Organization reported a record daily increase in global coronavirus cases on Sunday, with the total up by more than 230,000.

In the United States, infections surged over the weekend as Florida reported an increase of more than 15,000 new cases in 24 hours, a record for any state.

A bumpy ride for oil

“It has been all but a bumpy ride for oil during the last months and the OPEC+ deal on supply has been a pillar for the market. The upcoming OPEC+ meeting this week is now expected, as planned, to make this pillar a bit weaker,” said Rystad Energy’s analyst Louise Dickson.

OPEC and allies to ease production cuts

OPEC and allies including Russia, a group known as OPEC+, are expected to ease their production cuts to 7.7 million barrels per day (bpd) after a recovery in global oil demand. OPEC+ cut output by a record 9.7 million bpd for May, June and July.

Libya, meanwhile, re-imposed force majeure on all oil exports on Sunday because of a renewed blockade by eastern forces.

The move comes only two days after Libya exported its first crude cargo in six months.

Oil facility attacked

The military of Yemen’s Houthi group said it had attacked a large oil facility in an industrial zone in the southern Saudi city of Jizan, but oil prices were not greatly affected by the news.

Rising tension between the United States and China over the COVID-19 pandemic and other issues also pressured prices.

China announces sanction against U.S.

China on Monday announced sanctions against U.S. officials and entities in retaliation for Washington’s sanctions against senior Chinese officials.

U.S. President Donald Trump on Friday said he was not thinking about negotiating a Phase 2 trade deal with China.

Saudi oil Minister’s views

Saudi Oil Minister Prince Abdulaziz bin Salman likes the idea of OPEC+ acting as the central bank of oil.

And he expresses admiration for Alan Greenspan, former chairman of the U.S. Federal Reserve.

Having successfully doubled crude prices over the past few months through unprecedented output cuts, the OPEC+ alliance led by the Saudis and Russia is poised to begin unwinding these stimulus measures.

Fuel demand recovers

As fuel demand recovers with the lifting of coronavirus lockdowns, the producers are about to open the taps a little.
But as Greenspan’s successors discovered seven years ago, taking away the punch bowl carries its own risks.

Second wave of pandemic

second wave of the pandemic threatens another slump in oil consumption, while the billion-barrel mountain of inventories that piled up during the first outbreak still looms.

If OPEC+ increases supply just as the market falters then prices could crash once again.

A sense of balancing act

It’s a balancing act that Prince Abdulaziz and his counterparts must weigh on July 15, when they hold an online meeting of the Joint Ministerial Monitoring Committee, the panel that reviews OPEC+’s progress.
As a result, Riyadh is expected to insist that if output is restored, countries abide by their mandated limits — and that exporters who haven’t yet made their share of the cutbacks atone for it.

 

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Source: Reuters