DTN Oil

WASHINGTON (DTN) -- Crude and refined products futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange finished a volatile trading week with sharp losses, sending West Texas Intermediate September below $63 barrel (bbl) at expiration Friday afternoon, as traders reassess prospects for a delayed recovery in global oil demand this year, hammered by the aggressive spread of COVID-19 infections and rising inflation across major oil consuming economies.

Further weighing on the oil complex, Bakers Hughes reported Friday afternoon the number of active oil rigs in the United States increased for the third consecutive week through Friday to the highest level since April 2020 at 405. The number of oil-directed rigs is now 222 higher compared to a year ago, with a dozen rigs added in August so far. More evidence of rising crude production was found in data released Wednesday by the Energy Information Administration showing domestic operators added 100,000 barrels per day (bpd) of crude output during the week ended Aug. 13 for an 11.4 million daily output rate -- the highest since May 2020. In its latest Short-Term Energy Outlook, EIA forecasts output would average around 11.1 million bpd for the remainder of the year before hitting 11.8 million bpd by the end of 2022.

Globally, the Organization of the Petroleum Exporting Countries together with Russia-led partners, known as OPEC+, began increasing crude production 400,000 bpd a month in August after members reached consensus to gradually unwind agreed to production cuts made during the depth of the pandemic in the second quarter 2020. OPEC+ production cuts totaled 5.759 million bpd in July, with monthly increases set to continue through December 2022 or until all cut output is restored.

Compliance among OPEC members eased to 116% last month from June's 120% compliance rate, according to private surveys, while their non-OPEC counterparts scored a compliance rate of 97% in July. Reduced OPEC compliance was mostly driven by Saudi Arabia, with the kingdom restoring the remaining 400,000 bpd of an additional unilateral cut of 1 million bpd above its quota in the first quarter last month.

Rising global oil production is met with concerns over flagging oil demand in major Asian and Western economies, prompting several investment banks to downgrade their growth forecasts for the third quarter. Goldman Sachs this week slashed its third quarter U.S. gross domestic product outlook from 9.8% to 5.5%, noting the "impact of the Delta variant on growth and inflation is proving to be somewhat larger than we expected. Spending on dining, travel, ... is likely to decline in August, though we expect the drop to be modest and brief," they wrote in a note.

The team at Oxford Economics estimates the U.S. economic recovery plateaued at midsummer and carried stalled progress into early August, with contractions seen across five of the six subcomponents they measured. Further details of the report show greater consumer caution weakened demand and mobility this month, which fell to multiweek lows. The economists said employment soured, production retrenched, and the health tracker fell on surging Delta variant contagion.

States in the South saw the sharpest drops, led by Louisiana, Florida, and Mississippi, corresponding with the recent uptrend in COVID-19 infections. New COVID-19 cases have surged to 138,000 a day and hospitalizations and deaths have risen since early August, according to the data from John Hopkins University.

"While a significant deterioration in the health situation is a downside risk to our outlook, rising inoculation rates offer protection against severe COVID cases and a new economic downturn," said Oxford Economics.

On Friday, NYMEX September West Texas Intermediate expired $1.37 lower at $62.32 bbl, and next-month delivery October WTI futures settled the session at $62.14 bbl. Brent crude for October delivery declined $1.27 to $65.18 bbl. Both crude benchmarks posted steep losses on the week, with WTI down 8% and Brent incurring a 7% loss.

NYMEX September ULSD dropped 6.08 cents or 2.3% to settle at $1.9082 gallon and September RBOB futures plunged 5.79 cents for a $2.0236 gallon settlement.

The U.S. Dollar Index reversed earlier gains after reaching 93.750, a 10-month high, to settle marginally lower at 93.508. Minutes from last month's Federal Open Market Committee meeting revealed policymakers are likely to roll back $120 billion a month in asset purchases as soon as this year, which is earlier than previously thought, boosting the value of U.S. currency this week.

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