Crude Oil Recovers as Saudi Arabia Promised to Cut Exports in August

Crude oil prices recovered in an otherwise quiet market, driven by the OPEC’s pledge to cut exports in August. UAE energy minister Suhail Al Mazrouei noted that the members might discuss further extension of the output cuts in November. The front-month WTI crude oil contract climbed higher to 46.53 before ending the day at 46.34, up +1.25%, while the Brent contract gained +1.12% to close at 48.6 for the day.

Saudi Arabia’s oil minister Khalid Al-Falih announced that it would cap its exports at 6.6M bpd in August, 1M bpd below that the same period last year. He acknowledged that “the market has turned bearish with several key factors driving these sentiments”, admitting that weaker compliance with cuts by some OPEC states and a rise in OPEC exports were one of the factors leading to weaker oil prices. He added that “some countries continue to lag which is a concern we must address head on” and “exports have now become the key matrix to financial markets and we need to find a way to reconcile credible exports data with production data”. On the global oil demand outlook, Falih expect growth would reach +1.4- 1.6M bpd in 2018, a rate that should offset US output expansion.

For Nigeria and Libya, the two OPEC members that are exempted from the output cut deal, the former has agreed to cap or even reduce its supply if it can maintain output of 1.8M bpd a day, while the latter might begin capping production when it hits 1.25M bpd. Recall that OPEC has agreed with come non-OPEC producers led by Russia to cut oil output by a combined 1.8M bpd from January 2017 until the end of March 2018. Nigeria and Libya were exempted from the cut as they struggle to recover the oil industries after years of civil war and militant attacks.

As we have emphasized for long, the key driver for the oversupply is US shale boom. Dave Lesar, Executive Chairman of Halliburton, the world’s top fracking-services provider, has recently suggested that “rig count growth is showing signs of plateauing and customers are tapping the brakes”. Baker Hughes reported that the number US oil rigs dropped -1 unit to 764 in the week ended July 21, marking the second decline in four weeks.

On the dataflow, US flash Markit manufacturing PMI added +1.2 points to 53.2 in July, highest since March, and the services PMI steadied at 54.2. The composite PMI climbed + 0.3 point to 54.2, highest since January. Separately, existing home sales dropped -1.8% m/m in July. The reading only climbed +0.7% from the same period last year. In the Eurozone, the flash Markit manufacturing PMI slid -0.6 points to 56.8 in July, and the flash services PMI steadied at 55.4. Note that Germany’s manufacturing PMI dropped quite a bit, by -1.3 points, to 58.3 for the month. Despite this, the reading remained the highest in 6 years.

Today, US consumer confidence index probably fell -2.9 points to 116 in July. In the Eurozone, Germany’s IFO business index might have dipped -0.2 point to 114.9 in July. The expectations and current assessment indices probably softened to 106.5 and 123.8, respectively, from 106.8 and 124.1 in June.