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Crude Oil Slips Amid Concerns Over Production Cuts

Oil markets headed lower Thursday, on concerns record production cuts will be scaled back amid disagreements within OPEC over output reduction compliance.

At 8:40 AM ET (1240 GMT), U.S. crude futures traded 1.4% lower at $36.77 a barrel. The international benchmark Brent contract fell 0.9% to $39.45.

Oil prices have soared over the past six weeks, thanks to record supply cuts by the Organization of the Petroleum Exporting Countries and allies, including Russia, a group dubbed OPEC+.

Two of the major producers in this group, Saudi Arabia and Russia, have also agreed a preliminary deal to extend the 9.7 million barrels a day cut for another month, but this is dependent on compliance from their partners in the group – “in particular, Iraq and Nigeria, whose compliance over May came in at just 42% and 33% respectively,” said analysts at ING in a research note.

“It does appear that any extension of current cuts will be largely dependent on these countries improving their compliance levels, and potentially even making up for their lack of compliance in May.”

Without a new deal, OPEC+ is set to taper its cuts to 7.7 million barrels a day from July 1, from 9.7 million barrels a day in June and May. Additionally, the likes of Saudi Arabia could also cancel the extra voluntary cuts they announced for June.

The group was originally scheduled to meet next week, but talk emerged at the start of this week that there could be a virtual ministerial meeting this week.

Saudi Aramco (SE:2222) is set to delay its July crude official selling prices until at least Sunday pending the outcome of a meeting of OPEC+ producers, Reuters reported, citing two sources familiar with the matter.

Saudi Aramco typically issues its official selling prices by the 5th of each month, setting the trend for Iranian, Kuwaiti and Iraqi prices and affecting more than 12 million barrels of oil per day bound for Asia.

Also weighing on the price of crude is the ongoing spat between China and the U.S., with the latest manifestation of this being the ending of flights between the two countries, the world’s two biggest economies.

Additionally, data from the Energy Information Administration Wednesday showed that diesel demand fell to a 21-year low last week and gasoline stockpiles swelled.

The figures suggest that fuel consumption in the world’s largest oil consumer isn’t recovering as quickly as previously anticipated.