Oil recovered slightly after suffering its worst reaction to an OPEC meeting in more than four years.
Prices edged higher by about 0.6% on Wednesday after a report showed a contraction in U.S. crude stockpiles. They were still far from recovering their losses from the previous day’s session when fears about the global economy overshadowed OPEC’s decision to prolong production curbs. It was the biggest drop following an OPEC gathering since November 2014.
The cartel and its allies agreed to extend output cuts for nine months, but divisions remained over Saudi Arabia’s push to target even deeper reductions, with Russia expressing doubts at the end of a summit in Vienna. Anxieties over global growth resurfaced following weak manufacturing reports from the U.S., China and Europe. Bank of England Governor Mark Carney warned of dangers from rising protectionism around the globe, citing a “widespread slowdown” that may require a major policy response.
“Growth concerns continue to weigh on the crude market and the markets are beginning to query to what extent can OPEC+ continue to cut production in sustaining prices,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. in Singapore. “Production levels have already been severely reduced and there is limited scope for further supply curbs. If WTI continues to come on strong, what can OPEC+ really do? It increasingly looks like a short-term solution.”
West Texas Intermediate crude for August delivery rose 34 cents to $56.59 a barrel on the New York Mercantile Exchange as at 9:30 a.m. Singapore time.
An American Petroleum Institute report showed crude inventories fell by 4.97 million barrels last week, according to people familiar with the data. If it’s confirmed by government data later Wednesday, that would be a third straight weekly drop.
WTI tumbled by 4.8% on Tuesday, the steepest decline since May 31. The slide accelerated as the contract crashed through several key technical trading levels, crossing below its 50-, 100- and 200-day moving averages.
Brent for September settlement added 32 cents, or 0.5%, to $62.72 a barrel on London’s ICE Futures Europe Exchange. Prices declined 4.1% on Tuesday. The global benchmark crude traded at a $6.01 premium to WTI for the same month.
Brent is bearing the brunt of global demand concerns. The spread between contracts for December 2019 and December 2020 fell Tuesday to just $1.91 a barrel, compared with $2.44 for the same WTI contracts. It was at $1.94 on Wednesday.
The drop in crude prices on Tuesday was an “anomaly,” OPEC Secretary-General Mohammad Barkindo told reporters in Vienna.
Saudi Arabia said it would keep its output below 10 million barrels a day, even lower than required under the so-called OPEC+ deal. Saudi Energy Minister Khalid Al-Falih said he was “enthusiastic” about the outlook for oil demand.
Yet Russia, the other de facto leader of the group, questioned a Saudi proposal to use the average of 2010 to 2014 global oil inventories to set future production targets. That move, a change to current policy, would require deeper cuts but achieve the higher prices the Saudis need to balance their budget.
The OPEC pact leaves the door open for U.S. shale producers to grab more market share, as the group will have to cut deeper to achieve inventory targets, according to Goldman Sachs Group Inc. The decision creates a clearer downside risk to the bank’s forecast for Brent to average $60 a barrel next year, even though it could result in some shorter-term price spikes.