DTN Oil

WASHINGTON (DTN) -- Nearby delivery month oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled lower for a second session on Thursday, weighed down by unconfirmed reports that the Organization of the Petroleum Exporting Counties and Russia-led partners reached a compromise with the United Arab Emirates, allowing for a higher production baseline under the joint agreement to lift output quotas for the next month and onward, while a rallying U.S. dollar and lingering concern over softening gasoline demand domestically fueled additional selling pressure.

With no date set for the next OPEC+ meeting, markets remain on edge over unconfirmed reports the 23-nation alliance came to an agreement with the UAE to raise joint production for August. Earlier reports indicated OPEC+ agreed to boost crude output by 400,000 barrels per day (bpd) from August to December 2021, bringing back around 2 million bpd of shut-in production. The deal was reportedly blocked by opposition from UAE representatives who requested a review of the current production quotas, citing outdated data and millions of dollars invested in expanded capacity. Should reports be confirmed by OPEC+ officials in the coming days, the deal would open the door for other members of the alliance to raise their production quotas, undermining compliance with the joint agreement. On the other hand, the deal removes uncertainty around future OPEC+ supplies and reduces the chance of an all-out price war among the members of the cartel and Russia-led partners.

Regardless of the outcome, traders saw the reports as bearish for the global oil market struggling with a new wave of COVID-19 infections in some of the major oil consumers, including the United States and European Union. Gasoline supplied to the U.S. market, a measure of demand, plummeted 760,000 bpd or 8% during the holiday week covering the July Fourth weekend -- typically the peak for summer driving demand. Multi-year high gasoline prices at the pump joined with concerns over resurgent virus cases could have kept American motorists off the roads during the holiday-shorted week. Demand for distillate fuels, including diesel and fuel oil, tumbled 676,000 bpd from the previous week to 3.164 million bpd.

Further weighing on the oil complex, the U.S. Dollar Index regained upward momentum in afternoon trade Thursday to finish above the 92.6 level despite rather dovish remarks from the Federal Reserve Chairman Jerome Powell during his Congressional testimony this week. On Wednesday, Powell told lawmakers the economy is "way off" for central bank to scale back its monthly asset purchases and raise interest rates. Thursday morning the Bureau of Labor Statistics reported the number of Americans seeking unemployment benefits for the first time still well above pre-pandemic levels at 360,000, suggesting a rather slow and uneven progress in the labor market's recovery. The Fed chief also acknowledged that inflation had risen to uncomfortably high levels but maintained the recent surge in consumer prices is tied to the economy's reopening and should fade over time. "We're experiencing a big uptick in inflation, bigger than many expected, bigger certainly than I expected, and we're trying to understand whether it's something that will pass through fairly quickly, or whether, in fact, we need to act," Powell said in response to questioning during a Senate Banking Committee hearing on Thursday. "One way or another, we're not going to be going into a period of high inflation for a long period of time because, of course, we have tools to address that."

The U.S. consumer price index, a measure for inflation, came in well above expectations for June at 0.9% increase, following a 0.7% gain in the prior month and 0.9% hike in April. The trajectory of price increases has put further pressure on Federal Reserve narrative that inflation is transitory and would not stick for long.

On the session, NYMEX August West Texas Intermediate futures declined $1.48 to $71.65 barrel (bbl) settlement, and international Brent crude benchmark for September delivery fell $1.29 to settle at $73.47 bbl. NYMEX August ULSD futures dropped more than 3 cents to settled at $2.1126 gallon and the front-month RBOB contact plunged 4.32 cents to $2.2503 gallon settlement.

Liubov Georges can be reached at liubov.georges@dtn.com