WTI Hits $40 for the First Time in Three Months Following Brent Crude

OPEC+ Agrees to Largest Ever Production Cut Extension
Expectations Rise for Increased Demand from Economic Activity Resumption
Variables Include 'Free Riding' and 'Shale Production'

[Asia Economy Reporter Naju-seok] West Texas Intermediate (WTI) crude oil in the United States has recovered to the $40 per barrel level for the first time in three months. This is attributed to the extension of the largest-ever production cuts agreed upon by OPEC+ (the Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies), along with expectations of increased demand due to the resumption of economic activities.

WTI July delivery briefly reached $40.29 per barrel in the over-the-counter market on the 8th. This is the first time in three months since it hit $42.04 on March 6. At the same time, Brent crude August delivery was trading at $43.29, up 2.34% ($0.99) from the previous trading day.

The market analysis suggests that the rise in oil prices is the result of a combination of reduced supply and recovering demand. On the 6th (local time), OPEC+ held an emergency video conference and agreed to cut daily oil production by 9.6 million barrels next month. Initially, at the April OPEC+ meeting, it was decided to reduce daily oil production by 9.7 million barrels in May and June, then scale back the cuts to 7.7 million barrels starting in July. However, OPEC+ reversed this policy considering oil demand and other factors. The adjustment of the cut from 9.7 million barrels to 9.6 million barrels reflects Mexico's request for an exception.

Notably, in this OPEC+ agreement, member countries decided to enforce strict compliance with the production cuts, increasing the likelihood of high-intensity reductions. Saudi Arabia and Russia, who led the OPEC+ meeting, required Iraq, Nigeria, Angola, and Kazakhstan?countries that had agreed to cuts but failed to fully implement them?to reduce their oil production additionally by the amount of non-compliance until September.

The resumption of economic activities by countries that had imposed lockdowns to curb the spread of COVID-19 also acted as a positive factor in the oil market. In particular, the U.S. unemployment rate in May was confirmed at 13.3%, much lower than the initially expected 20%, boosting expectations for a rapid economic recovery.

Despite the demand decline caused by the novel coronavirus (COVID-19), WTI struggled after failing to reach a production cut agreement on March 6. Saudi Arabia, the dominant power in the Middle East, initiated an oil price war, leading to the first-ever negative oil prices in April.

However, concerns remain about whether the production cut agreement will be fully implemented. Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, said, "Although Iraq and Nigeria have promised 100% compliance and additional cuts for non-compliance, debates over adherence to the agreement are expected to continue throughout the summer."

Bloomberg News pointed out that even if Iraq and others do not fully comply with the agreement, the only way Saudi Arabia and Russia can punish them is through an oil price war, which would hurt everyone. Additionally, as oil prices recover, the resumption of oil production by U.S. shale companies that had halted operations due to profitability issues is also expected to be a variable in the oil market.

This content was produced with the assistance of AI translation services.