Oil gives up US Fed rate cut gains, sheds 3% on OPEC+ December output hike bets; Brent drops to $71/bbl

International crude oil prices reversed their gains picked after the US Federal Reserve's supersized interest rate cut and dropped over three per cent on Thursday, September 26, on a media report that Saudi Arabia, the world's top crude exporter, will give up its price target in preparation for raising output.

Brent crude futures were last down $1.62, or 2.2 per cent, to $71.84 a barrel, while US West Texas Intermediate crude fell $1.6, or 2.3 per cent, to $68.09 per barrel. Both contracts fell more than $2 per barrel. Back home, crude oil futures tarded 2.9 per cent lower at ₹5,667 per barrel on the multi-commodity exchange (MCX).

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What's dragging crude oil prices?

-Saudi Arabia is preparing to abandon its unofficial price target of $100 a barrel for crude as it prepares to increase output, the Financial Times reported. The Organization of the Petroleum Exporting Countries—led de facto by Riyadh—along with the group's allies, including Russia, are known as OPEC+. 

-The OPEC+ cartel has been cutting oil output to support prices. However, prices are down nearly six per cent so far this year, amid increasing supply from other producers, especially the US, and weak demand growth in China.

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-Analysts said the prospect of additional supply from Libya and Saudi Arabia has been the main driver behind the latest weakness. A United Nations statement on Wednesday said delegates from divided Libya's east and west agreed on appointing a central bank governor. 

-This step could help resolve the crisis over control of the country's oil revenue, which has disrupted exports. Libya's crude exports have averaged about 400,000 barrels per day (bpd) in September, down from over 1 million bpd in August.

-The news of a new Chinese stimulus package limited further losses. The top government officials in China, the world's largest crude oil importer, pledged on Thursday to deploy "necessary fiscal spending" to meet this year's economic growth target of roughly five per cent, acknowledging new problems and raising market expectations for fresh stimulus in addition to measures announced this week.

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Where are oil prices headed?

Analysts said WTI crude oil prices surged above $72 per barrel on Tuesday due to concerns about potential supply disruptions in the US from hurricane threats, escalating conflict in the Middle East, and an improving demand outlook driven by fresh stimulus in China. 

Pranav Mer, Vice President, EBG - Commodity & Currency Research, JM Financial Services Ltd said, "Prices are additionally supported by a higher than expected drawdown in oil and products inventories, as reported by API. On chart, trend remains positive till prices are above support at 5,920, can buy at dips for target at 6,050/ 6,100".

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In the Middle East, Israel conducted strikes across southern Lebanon, resulting in nearly 500 fatalities—the deadliest day of conflict since the 2006 war with Hezbollah. The looming threat of a second hurricane in two weeks has prompted US oil producers to evacuate personnel from offshore platforms in the Gulf of Mexico. 

"Today, oil prices steadied around $71.30 per barrel amid rising geopolitical risks related to the Israel-Lebanon situation and expectations of a draw in US EIA oil inventories. Iran's President Masoud Pezeshkian stated that Israeli attacks in Lebanon “cannot go unanswered.” Meanwhile, the API reported a significant draw of 4.339 million barrels for the week ending September 20," said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.

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