Brent at $40 in June – who would have thought just one month ago? OPEC+ is still wrangling about for how long to extend its first tranche of monster cuts, but an agreement seems imminent.
Brent for August settlement shot 2% higher this morning to trade above $40 as the OPEC+ powerhouses continue to debate extension behind the scenes.
We may have a 4 million bpd crude stock draw in July if OPEC+ extends by one month, and instead starts tapering down cuts from August onwards. Russia’s benchmark medium-sour crude, Urals, delivered into Europe, is trading at strong premiums to Brent helping the Russian side of the deliberations.
Tightness in the physical crude markets is omni-present all of a sudden, especially in sour crudes, as the OPEC+ export cuts have been powerful. Refineries are suddenly feeling a squeeze in access to prompt barrels while refinery margins are still weak.
Meanwhile, though, crude stocks continue to draw at Cushing, Oklahoma – the delivery point of the NYMEX WTI contract. We anticipate that total US crude storage will increase by 4.5 million barrels during week 22, including the 2.3 million barrel build in onshore commercial storage mentioned above, a 4.0 million barrel build in the SPRs, and a 1.8 million barrel draw from floating storage in the Gulf Coast.
In the following weeks, we expect US onshore commercial crude stocks to tick down as refinery demand recovers and domestic oil production drops a bit further. WTI looks set to remain fundamentally supported as the July WTI contract starts to flirt with the $40 range from below.
Seeing the bigger picture, today’s price boost is the usual price build-up before a major meeting.
More often than not, in anticipation for an OPEC+ meeting, prices rise in times of crisis, as most traders always expect that producing countries will agree on a bullish development.
It doesn’t always work this way of course, but the days before the meeting are always sprinkled with enthusiasm and rumors, and this case is no different.
Rumor has it that OPEC+ may extend the generous June cuts and that drives prices up.
If the existing agreement is maintained and committed cuts get reduced from June levels, expect prices to lose a little. It’s just the law of how the physical market works.