Oil futures ended higher on Friday, but the U.S. benchmark logged its biggest weekly drop since March, pressured by the possibility of more crude supplies on the global market and risks to the demand outlook.
Phil Flynn, senior market analyst at The Price Futures Group, attributed the price shift higher Friday, in part, to expectations that oil prices will have to “go up a lot higher” if the market is going to have enough incentive to meet future oil demand.
More than likely, however, the move up was “more technical” as traders start to realize that the move down on the weak consumer confidence number was “probably an overreaction, mainly because retail sales were still very strong,” he told MarketWatch.
West Texas Intermediate crude for August delivery
tacked on 16 cents, or 0.2%, to settle at $71.81 a barrel on the New York Mercantile Exchange after tapping an intraday low of $70.41. The U.S. benchmark ended down 3.7% for the week, marking the biggest weekly fall for a front-month contract contract since the week ended March 26, according to Dow Jones Market Data.
September Brent crude
the global benchmark, added 12 cents, or 0.2%, at $73.59 a barrel on ICE Futures Europe, though still down 2.6% for the week, its biggest weekly slide since May.
Oil prices had lost more ground Friday shortly after data showed that U.S. consumer sentiment index from the University of Michigan fell to 80.8 in July from 85.5 in June.
“The shocking drop in consumer confidence really hit” oil, said Flynn. Retail sales, meanwhile, went through the roof, but “people were less confident as they were spending money.”
“Regardless, the shocking drop on the University of Michigan consumer confidence caused oil to drop on fears that it would reduce gasoline demand from consumers,” Flynn told MarketWatch. The Energy Information Administration reported on Wednesday a weekly decline in implied motor gasoline demand.
The United Arab Emirates and Saudi Arabia reportedly reached a compromise this week that would allow OPEC+ to further relax production curbs beginning next month, contributing to oil’s price loss this week.
“The possibility that the OPEC+ agreement might fall apart, even if Saudi Arabia and the UAE reach a compromise, suggests that the group won’t keep enough oil off the market to send prices higher from here,” Michael Lynch, president of Strategic Energy & Economic Research, told MarketWatch.
The reported compromise with the UAE could also “see others clamor for relief from quotas in the short term, which would at the least be bad for market psychology,” he said.
Meanwhile, the number of COVID-19 caseS globally has climbed on the heels of the spread of the delta variant, raising concerns for renewed economic restrictions that would limit energy demand.
“The spread of the delta variant and subsequent new economic restrictions overseas paired with the disappointing demand metrics in the EIA data this week are weighing on the demand outlook for the market,” analysts at Sevens Report Research wrote in Friday’s newsletter.
Crude prices had fallen sharply on Wednesday in part due to the fall in fuel demand, but also because of reports that the U.A.E. and Saudi Arabia had reached a compromise in their dispute over output cuts. The deal would reportedly allow the U.A.E. to use a higher baseline to determine its output level beginning in April. OPEC+ has yet to ratify the deal, which would see the group further relax its existing output cuts by around 400,000 barrels a day per month from August through December, adding around 2 million barrels a day of production by the end of the year.
“All signs indicate that OPEC+ is heading for a potential compromise agreement that will allow U.A.E. to secure a baseline adjustment, but other producers will undoubtedly seek similar treatment and potentially prolong the deliberations” heading into an August meeting, wrote analysts at RBC Capital Markets, in a note.
The fall in crude prices, meanwhile, “is remarkable in view of the steep decline in U.S. crude oil stocks and the prospect of a marked rise in oil demand and a sizable supply deficit in the months until year’s end,” wrote Carsten Fritsch, analyst at Commerzbank, in a note.
Fritch noted that OPEC, in its monthly report Thursday, forecast oil demand to rise to 99 million barrels a day by the end of 2021, around 5 million barrels a day higher than in the first six months of the year. OPEC looks for demand to hit pre-pandemic levels in 2022, topping 100 million barrels a day later in the year.
Back on Nymex, August gasoline
rose nearly 0.2% to $2.25 a gallon, for a weekly loss of 1.7%, and August heating oil
finished little changed at $2.11 a gallon — around 1.9% lower for the week.
August natural gas
settled at $3.67 per million British thermal units, up 1.7% on Friday, though unchanged for the week.