Oil prices were on track to wrap up another month of gains early on Friday, although concerns about the pace of oil demand recovery have capped daily gains in July.
As of 9:43 a.m. EDT on Friday, WTI Crude was up 1.18 percent at $40.38, and Brent Crude was up 0.75 percent on the day, at $43.26.
Oil recovered some of the losses from Thursday, when prices sank after U.S. data showed that the real gross domestic product (GDP) of the world’s largest economy crashed by 32.9 percent annually in the second quarter of 2020, due to the coronavirus-related impacts. This was the worst reading of U.S. economic growth data on record. The economic slump in Q2 –although widely expected – spooked the market, including the oil market, about the economy and the trajectory of the oil demand recovery.
On Friday, oil prices rose early in the morning and were on course for a monthly gain in July. An extremely weak U.S. dollar supported oil prices early on Friday—the dollar was on track for its largest monthly loss in a decade amid fears that resurging COVID-19 cases could slow the economic recovery.
Despite the monthly gain in July, oil prices have been trading in a narrow range in recent weeks as signs of demand recovery have been dampened by spiking coronavirus cases in many countries.
As we move into August, the OPEC+ coalition is set to ease their record production cuts by 2 million barrels per day (bpd), which will likely mean a new glut on the market, also because of slower-than-expected demand recovery, according to Rystad Energy.
Oil prices may be headed for a correction next month, as sluggish oil demand recovery and the return of some production from OPEC+ and North America are weighing on market sentiment. In addition, the oil futures curve has recently flipped to contango again—a sign of a new glut looming.
By Tsvetana Paraskova for Oilprice.com
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Still, the inherent vitality and robustness of the US economy will enable it to recoup most of its losses once the pandemic is controlled. One bullish factor is that sooner or later an effective vaccine will be developed..
And while OPEC+ easing its production cuts by 2 million barrels a day (mbd) from the first of August might have a bearish impact on global supplies and prices, it will be more than offset by the very bullish factor of US oil production struggling this year and the following years to even produce 6-7 mbd.
Still, oil prices are projected to hit $45-$50 in this half of the year and touch $60 in early next year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London