U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week after OPEC and its allies agreed on a compromise to continue some cuts to production to cope with coronavirus-hit demand even though these fell short of expectations.
Despite the firming of prices, the deal came in below expectations and amounted to a compromise between opposing forces. Throughout the week, the market was underpinned by the optimism surrounding the rollout of coronavirus vaccines and renewed hopes for a U.S. stimulus deal.
OPEC and Its Allies Agree to Compromise
OPEC and its allies, including Russia, agreed to increase output by a modest 500,000 barrels per day (bpd) from January. The increase means OPEC+ would move to cutting production by 7.2 million bpd, or 7% of global demand from January, compared with current cuts of 7.7 million bpd.
OPEC+ had been expected to extend existing cuts until at least March, after backing down from earlier plans to boost output by 2 million bpd.
US Energy Information Administration Weekly Inventories Report
In the United States, crude stockpiles fell last week, while gasoline and distillate inventories rose sharply as refiners slowed production amid weakening demand, the Energy Information Administration (EIA) said on Wednesday.
Crude oil stocks fell by 679,000 barrels in the week to November 27, less than the 2.4 million-barrel decline forecast in a Reuters poll of analysts.
Gasoline stocks increased by 3.5 million barrels, while distillate inventories were up by 3.2 million barrels.
Baker Hughes: US Drillers Add Oil and Gas Rigs for 11th Week in 12
U.S. Energy firms last week added oil and natural gas rigs for the 11th time in 12 weeks as producers return to the wellpad even as most are cutting spending this year and next.
The oil and gas rig count, an early indicator of future output, rose three to 323 in the week to December 4, energy services firm Baker Hughes Company said in its closely followed report last Friday.
That was 476 rigs, or 60%, below this time last year.
The number of operating rigs surged since August, when it hit a record low of 244, according to Baker Hughes data going back to 1940.
U.S. oil rigs rose five to 246 last week, their highest since May, while gas rigs fell two to 75, according to Baker Hughes data.
The price action after the announcement of the OPEC+ compromise suggests investors were a little disappointed by the news. Furthermore, the news was largely priced into the market so we wouldn’t be surprised by a short-term top. Stimulus hopes and optimism over vaccines should underpin prices.
Crude oil prices rose throughout November as news of a coronavirus vaccine brought hope of a swifter global economic recovery. This news helped dampen the extremely bearish outlook for demand at the end of October.
In reaction to this news, several OPEC+ producers started questioning the need to keep such a tight rein on oil policy, as advocated by OPEC leader Saudi Arabia. This news may have encouraged some OPEC+ members to push for a smaller reduction in production cuts, leading to the OPEC+ compromise.
House Speaker Nancy Pelosi said on Friday that she saw “momentum” toward a coronavirus stimulus deal. Senate Minority Leader Chuck Schumer once again called for relief funding after data released Friday showed U.S. jobs growth had slowed in November, while President-elect Joe Biden also called for “urgent action” on a stimulus deal.
Meanwhile, a bipartisan group of U.S. senators is set to put forward legislation on Monday for an additional stimulus package worth around $908 billion, the Financial Times reported.