Oil futures: Crude back up after Saudi, Russia cuts extended

Quantum Commodity Intelligence – Crude oil futures rebounded during European trading hours on Thursday, with extended output cuts from Saudi Arabia and Russia enough to walk back much of Wednesday's losses after the market reacted to a surprise downgrade of the US' long-term credit rating.

Oct23 ICE Brent futures were trading at $84.82/b (1600 GMT), compared to Wednesday's settle of $83.20/b. That is up from one-week lows of $82.37/b touched during Asian trading hours.

At the same time Sep23 NYMEX WTI was trading $81.28/b versus Wednesday's close of $79.49/b.

The rebound comes as Saudi Arabia announced it would extend its 1 million bpd crude oil output cut into September. That was followed by Russia saying it would also take 300,000 bpd out of the market, a reduction from its current 500,000 bpd cut.

Those moves were enough to walk back almost all of Wednesday and early Thursday's losses, which came after ratings agency Fitch issued a surprise downgrade of US government debt, cutting the country's rating to AA+ from AAA on Tuesday.

The agency had pointed to "expected fiscal deterioration over the next three years," but the impact did not really land until US markets opened Wednesday, with crude benchmarks initially challenging yearly highs after the API reported a 15-million-barrel crude draw.

Much of the financial press has been dedicated to unpicking the agency's move and the market reaction in recent days.

JPMorgan CEO Jamie Dimon mocked Fitch's move as "ridiculous" and told CNBC, "It doesn't really matter that much" because it's the market, not rating agencies, that determines borrowing costs.

Outlier

The macroeconomic drama and Saudi Arabia and Russia's moves overshadowed a big cut in EIA crude stock estimates from the US, with the DOE agency marking a 17-million-barrel cut that perplexingly sparked a market selloff late Wednesday.

"While it was the largest ever fall in volume terms, it was viewed as an anomaly due to adjustment factors the EIA uses to calculate industry inventories," said ANZ commodity strategist Daniel Hynes.

"The EIA inventory report did also raise some red flags. Gasoline demand fell for the fourth straight week on a rolling four-week average, despite the country being in its busy summer driving season," added Hynes.

Gasoline inventories increased by 1.5 million barrels on the week – its largest weekly gain in two months – to climb to just over 219 million barrels, its highest since the start of July.

Deliveries fell 100,000 bpd last week to 8.84 million bpd, well below the 9.37 million bpd achieved during the four weeks leading up to the Independence Day holiday, with higher pump prices starting to bite.

Demand was down 4.4% on the year and 7.5% versus the same week in 2019.

Meanwhile, oil investors were keenly watching for any announcements from Saudi Arabia regarding output intentions from September and beyond, while Friday's OPEC+ JMMC meeting was not expected to signal any major policy change.