Oil prices spiked to the highest level in nearly three months on Friday as OPEC and its allies prepared to extend production cuts.
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The 23-member OPEC and its partners, led by Russia, are expected to approve an extension Saturday of the historic production cuts that were reached in April. The reductions, which were scheduled to be tapered at the end of this month, call for the group to reduce output by 9.7 million barrels per day.
Brent crude oil, the international benchmark, climbed by 5.4 percent to $42.14 per barrel. West Texas Intermediate crude oil, the U.S. standard, gained 4.4 percent to $39.66 per barrel.
OPEC and its allies will “extend the existing production cuts by another month,” Andrew Lipow, president of the Houston-based oil consulting firm Lipow Associates, told FOX Business. “And that, of course, improves the overall supply and demand dynamics.”
He added that oil prices are also being supported by the unexpected job gains in May and Tropical Storm Cristobal halting production in the Gulf of Mexico.
The U.S. economy's addition of 2.5 million jobs last month, surprising economists surveyed by Refintiv who were expecting a loss of 8 million workers, means demand for gas "will come back quicker than many have expected,” Lipow said.
Stay-at-home orders aimed at slowing the spread of COVID-19 brought nonessential travel to a standstill in March and April, reducing global demand by about 30 million barrels per day.
The combination of lower oil prices and the extension of the existing production cuts suggest supply and demand will “be back in balance” in August, Lipow said. He added that it may take well into 2021 or even 2022 for global demand to return to pre-coronavirus levels.
The price of both Brent and WTI crude may rise another $5 to about $45 a barrel, but that could “ecourage members of OPEC+ to be in poorer compliance” with the production cuts and entice U.S. suppliers to increase their output, he said.