SINGAPORE (July 14): Crude Oil futures contracts opened lower on Tuesday following a rising number of Covid-19 cases. Prices have dropped more than 1% on Monday as a meeting of OPEC+ countries this week is expected to taper production cuts. 

The meeting is rumoured to decide on relaxing supply cuts that have been propping up prices.

The increasing number of Covid-19 cases in the US, Brazil, India, and Australia may lead to fresh lockdown measures, which will, in turn, slow economic growth and curb energy demand.

The ICE Brent September Crude Oil contract stood at US$42.72 ($59.33) a barrel, down US$0.52, whilst the CME WTI August crude oil contract closed US$0.45 lower at US$40.10 a barrel. 

Meanwhile, the Dubai Crude Oil Dec20 futures contract traded on the Tocom Exchange had dropped 550 yen ($7.13) on Monday, closing at 28,240 yen /kilolitre in the night session. The contract later reopened at 28,400 yen/kilolitre during regular Exchange trading. 

The Shanghai International Energy Exchange INE Medium Sour Crude August contract opened weaker at 295.7 RMB ($58.66) per barrel after closing at 296.1 RMB in the night session. 

According to Philip Futures, there are rumours that several delegates in the committee are leaning toward reducing crude production cuts to 7.7 million barrels per day (bpd) for August, down from 9.7 million bpd in July. 

The brokerage also notes that Saudi Arabia could opt for higher oil production from August instead. Several members from top Russian oil producers are preparing to ramp up crude production next month in the absence of other guidance from the Russian Energy Ministry.

However, US crude oil output from seven major shale formations is expected to decline by about 56,000 bpd in August to about 7.49 million bpd, the lowest in the two years, the US Energy Information Administration said in a monthly productivity forecast on Monday. 

Despite this, inventories of crude oil are still above the five-year average. Genscape reported a 1.2 million-barrel addition at the Cushing hub during the week ending July 10, while reported a rise of as much as 1.75 million barrels at the hub.

At the opening of 2H20, the oil market had remained largely more focused on tightening supplies as OPEC production fell to its lowest in decades, attributable to the unexpected decline in output from Russia.

News reports also suggests that Saudi Arabia had been increasing pressure on those countries who failed to cut their production in line with the OPEC+ deal. The oil market needs such discipline to reach re-balance at prices at US$40. 

However, Phillip Futures says, not all is not gloom and doom. Oil prices may be signalling that the crude market may be getting close to switching from surplus to shortage.

“The contango in the structure of the forward curve of oil futures is narrowing much quicker than expected. The main risk comes from a premature increase in production, if either U.S. shale firms or members of OPEC+ try to boost output before consumption and stocks return closer to normal,” it says.