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Business News/ Markets / Commodities/  Why oil extended losses despite historic drop in US crude stocks - Explained
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Why oil extended losses despite historic drop in US crude stocks - Explained

Despite the record stock draw, US oil prices fell amid falls across financial markets after rating agency Fitch downgraded the US government's top credit rating, according to news agency Reuters.

US crude stocks fell in the week by 17 million barrels, the largest drop in US crude inventories according to records dating back to 1982Premium
US crude stocks fell in the week by 17 million barrels, the largest drop in US crude inventories according to records dating back to 1982

Oil prices extended losses on August 2 after sharp gains despite a historic drop in US crude stocks, as traders were cautious following the downgrade of US government top credit by a major ratings agency. US crude stocks fell in the week by 17 million barrels, the largest drop in US crude inventories according to records dating back to 1982, said the Energy Information Administration on Wednesday. 

The draw was driven by increased refinery runs and strong crude exports. Despite the record stock draw, US oil prices fell amid falls across financial markets after rating agency Fitch downgraded the US government's top credit rating, according to news agency Reuters.

Also Read: Oil snaps July rally, declines on stronger dollar; Brent at $84/bbl; what lies ahead?

US crude futures fell by $1.94, or 2.4 per cent, to $80.77 a barrel while Brent crude futures declined $1.77, or 2.1 per cent, to $84.41 a barrel. Both contracts rose by more than $1 earlier on the session, buoyed by falling US stockpiles in Tuesday's data from the American Petroleum Industry which also indicated a large US stockpile drawdown, according to Reuters.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for an August 21 expiry, were last trading lower by 2.23 per cent at 6,577 per bbl, having swung between 6,546 and 6,784 per bbl during the session so far, against a previous close of 6,727 per barrel.

Why did oil prices decline today?

-The United States of America's Long-Term Foreign-Currency Issuer Default Rating (IDR) was reduced to ‘AA+’ from ‘AAA’ by credit rating firm Fitch Ratings on Tuesday. A Stable Outlook was given in place of the Rating Watch Negative. The country ceiling has been affirmed at 'AAA'.

T-he rating has been downgraded, as a result of the expected fiscal decline over the following three years, the high and rising general government debt burden, and the erosion of governance compared to 'AA' and 'AAA' rated peers over the past 20 years, which has been demonstrated by numerous debt limit standoffs and last-minute agreements. Due to the Fitch downgrade, global markets across segments extended losses witnessing major sell-offs by investors over the weaker sentiment.

-Crude oil inventories have also begun to drop in other regions as demand outpaces supply, which has been constrained by deep production cuts from Saudi Arabia, said the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC).

-Analysts expect Saudi Arabia to extend its voluntary oil output cut of 1 million barrels per day for another month to include September in a meeting of producers on Friday. OPEC+, which groups OPEC and allies led by Russia, is unlikely to revise its current oil output policy when a panel meets on August 4, according to Reuters.

Technical View

‘’The OPEC oil output has fallen in July after Saudi Arabia made an additional voluntary cut as part of the OPEC+ producer group's latest agreement to support the market and an outage curbed Nigerian supply. The OPEC nations has pumped 27.34 million barrels per day this month, down 840,000 barrels per day from June.'' said domestic brokerage firm Religare Broking.

Religare Broking has mild-bullish sentiments on MCX Crude Oil. ‘’MACD divergence suggest mild positivity. Extended gains above 6,800 region may strengthen the prices further. Whereas, a dip below 6,710 may weaken the prices for the day,'' said the brokerage firm in its research report. Religare sees technical levels between 6,710 - 7000. The turnaround is seen at 6,710.

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Published: 02 Aug 2023, 10:36 PM IST
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