Brent oil rose above $40 a barrel for the first time in almost three months on signs that OPEC+ producers are close to agreeing on a short extension of their historic deal to cut output.
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Futures in London climbed around 1% after closing at their highest level since March 6, the day the OPEC+ alliance broke down.
Russia and several other nations in the group favor extending the production cuts that are set to ease from July by one month, according to people familiar with the situation. That’s within the range of Saudi Arabia’s call for a one to three-month elongation.
In more evidence the oil market is rebalancing, the American Petroleum Institute reported that stockpiles at the storage hub at Cushing, Oklahoma fell by 2.2 million barrels last week.
That would mark the fourth straight weekly decline if confirmed by U.S. government data due later on Wednesday.
While the global benchmark crude has now doubled from its low in mid-April, the path back to pre-virus levels of oil demand still looks uncertain. The civil strife rocking the US increases the risk of a second wave of infections there, while international travel could be impacted for years to come. The rally may also be blunted by the return of American shale production.
“The market is much closer to re-balancing, with demand trends showing this and countries already opening up,” said Suvro Sarkar, vice president of group research at DBS Bank Ltd. However, the impact of the upcoming OPEC+ meeting has been largely priced in, so there’s limited upside from here, he said.
Brent for August delivery rose 1.2% to $40.06 a barrel on the ICE Futures Europe exchange as of 11:09 a.m. in Singapore after closing up 3.3% on Tuesday. Contangoes for the grade’s three- and six-month timespreads narrowed further, indicating concerns over a supply glut have eased.
West Texas Intermediate for July climbed 2.1% to $37.58 on the New York Mercantile Exchange following a 3.9% increase in the previous session. The American benchmark has almost doubled since the end of April.
As recently as last week, Moscow’s stance was that it didn’t want to extend the OPEC+ cuts and favoured sticking to the original agreement. It’s not unusual for Russia and Saudi Arabia to hold different positions before OPEC+ talks. On most occasions the two producers have eventually found a compromise.
DBS said Brent will average $42 to $47 a barrel this year, $5 higher than its previous estimate. The easing of lockdown restrictions in some parts of the world ahead of infection rates peaking means the demand recovery could be faster than previously anticipated, the Singaporean bank said in a note. Morgan Stanley and Fitch Solutions have also raised their forecasts in the past week.
The API reported overall US crude stockpiles fell 483,000 barrels last week, according to people familiar with the data. Meanwhile, crude exports from OPEC’s Middle East exporters dropped by the most on record last month as the output-cut agreement kicked in and Russia came close to its reduction target.
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