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Oil Prices Diverge As Uncertainty Persists

  • Uncertainty is rampant in oil markets, with traders struggling to balance economic uncertainty with continued supply cuts and the rising cost of capital.
  • While Brent briefly jumped on the news of further cuts from Saudi Arabia and Russia, it was falling back in early trade on Wednesday.
  • WTI diverged from Brent in early trade on Wednesday, moving higher by more than a dollar but remaining below $71.

Crude oil prices, which had been rallying on the news that Saudi Arabia will extend its production cuts, began trade on Wednesday with a slight decline before WTI jumped even higher while Brent remained in the red.

Uncertainty in oil markets has traders struggling to balance economic risks with supply cuts, although those aren’t their only concerns. A new analysis by the Financial Times suggests that the rising cost of capital is keeping prices depressed while leaving the market more vulnerable to shocks in the future.

On the supply side, Saudi Arabia announced earlier this week that it will extend its voluntary cut of 1 million bpd in production to August and likely beyond. While the news did not come as a surprise, the size of the cuts prompted a positive response from the market.

“This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil market,” the Saudis said on Tuesday.

Meanwhile, Russia’s Deputy Prime Minister Alexander Novak said the country will reduce exports by half a million barrels daily next month.

As part of the efforts to ensure a balanced market, Russia will voluntarily reduce its oil supply in August by 500,000 barrels per day by cutting its exports to global markets by that quantity,” Novak said.

The combination of these reports should have sent prices higher for at least a week under normal circumstances but this week the market’s reaction to the news lasted less than a day.

At the time of writing, Brent crude was trading with a decline from opening while West Texas Intermediate was up by more than a percentage point.

"Oil prices came under pressure again due to lingering worries over a slowdown in the global economy and further hikes of interest rates in the United States and Europe," a Mitsubishi JFG analyst told Reuters.

Bloomberg noted that traders will be tuning into the Saudi Arabian energy minister’s address to the 8th OPEC International Seminar later today to get more insight into the group’s future plans.

The Commonwealth Bank of Australia, meanwhile, pointed out that attention may soon shift to the state of global oil inventories, as a Reuters poll predicted the API will later today report a third weekly inventory decline in a row.

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By Irina Slav for Oilprice.com

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EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
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