U.S. gasoline stocks rising by 1 million barrels last week also caused concern: File Image/Pixabay
After causing a week of declines due to worries that the failed Organization of the Petroleum Exporting Countries (OPEC) output talks would lead to global oversupply, crude traders on Wednesday responded to news of the cartel reaching an unexpected compromise by continuing the downward plunge, with oil prices dropping nearly 3 percent.
Brent settled down $1.73 per barrel, or 2.26 percent, at $74.76 per barrel, while West Texas Intermediate declined by $2.12, or 2.82 percent, at $73.13 per barrel.
Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors, said given that crude was nearing overbought levels, "It's not surprising to see it down."
Tariq Zahir, Tyche Capital Advisors
It's not surprising to see it down
The drops followed reports that Saudi Arabia and the United Arab Emirates reached a compromise that should, if ratified, extend a deal to curb output until the end of 2022 but also supply more crude to what has rapidly become a tight oil market as the world recovers from the Covid pandemic.
The UAE had opposed extending the existing deal until December 2022 from April 2022 unless it was granted a higher production quota, and sources told media that this baseline will be raised to 3.65 million barrels per day (bpd); a new date for the next OPEC meeting is expected to be announced soon.
Also weighing heavily on traders was the U.S. Energy Information Administration on Wednesday stating that although crude stockpiles draws last week were far greater than anticipated (and in their eighth consecutive draw), gasoline stocks rose by 1 million barrels compared with expectations for a 1.8 million-barrel drop.
Bloomberg on Wednesday noted that oil demand overall has indeed almost recovered but is different than prior to the pandemic: the news outlet pointed out that shifting consumer habits have driven up demand for naphtha to make plastics, as well as diesel to power the trucks and trains that deliver the goods; also, consumption of liquefied petroleum gas, a common cooking fuel in parts of Asia, is jumping.
Bloomberg stated, "Producers of crudes that are rich in naphtha and liquefied petroleum gases are experiencing stronger pricing; this is one of the reasons why barrels pumped from fields in the North Sea and U.S. shale deposits are fetching big premiums over grades exported from the Middle East."
For the record, the International Energy Agency estimated that oil demand in June was about 3 percent below where it stood in the same month in 2019, and that by December it will be back at parity.