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02.12.2020 02:42 PM
Oil sell-off continues on oversupply fears

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Yesterday, oil prices dropped amid persistent uncertainty over the deal on supply cuts. On December 2, the situation remained unchanged. Brent continues to decline after reaching the level of $47.30 per barrel.

The main reason for a drop in crude prices is the delay of the final decision on output cuts from the OPEC+. The talks on the deal extension from January 1, 2021 were put off until December 3.

The members of the alliance have already reduced oil production by 7.7 million barrels per day this year. According to the agreement, they have to maintain this level of reduced output until the end of the year. Previously, the cartel planned to ease production cuts to 5.7 million barrels per day starting from January 1, 2021. However, the second coronavirus wave and the rise of oil supply in Libya changed the whole picture. If the OPEC+ decides to ramp up oil production, the market will definitely face oversupply. Therefore, market participants expect the grouping to consider extending the current agreement for several months.

However, there is a disagreement between the major players. Thus, the UAE insists that all the participants should fully comply with the commitment and compensate for the previous oversupply. At the same time, Iraq warns that it is not able to continue further cuts due to the budget deficit. Meanwhile, Russia thinks there is no need to compensate for the oversupply. Since May 2020, Iraq and Russia have pumped excess oil of 0.61 and 0.53 million barrels per day respectively. This is exactly the amount they must include in their current production cuts to fulfill their obligations.

The current dispute between the OPEC+ members puts the positive outcome of the deal at risk. This may leave the oil market completely without support.

Analysts still hope that the cartel will finally reach a compromise and extend the deal for the first quarter of 2021. The final decision will be declared only by the end of the week. Until then, oil quotes will remain under pressure.

In addition, the Norwegian Petroleum and Energy Ministry announced that production cuts introduced in April this year will expire on December 31. Although Norway recognizes the importance of the OPEC+ deal, it does not plan to reduce its oil production any longer.

According to the industry data from the API, oil inventories in the US rose by 4.1 million barrels last week. Before the release, analysts had predicted an increase by just 2.4 million barrels. Gasoline inventories were also up by 3.4 million barrels while experts forecasted a build of 2.4 million. Distillate stockpiles also exceeded expectations and rose by 334,000 in contrast to the forecast of 209,000 barrels. Oil imports also jumped by 130,000 barrels per day. The released data adds to the overall pessimism in the energy market and weighs further on oil quotes.

Andreeva Natalya,
Analytical expert of InstaForex
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