Oil futures pared some of their losses on Wednesday following data showing a third-straight weekly drop in U.S. crude supplies, as traders await the main event of the day: a decision by major producers on oil production.

Prices for oil had turned sharply lower early Wednesday, with traders attributing that move to reports that OPEC and its allies raised their global oil demand forecast for this year while Russia suggested that it’s ready to increase production above its set quotas.

Oil took a “quick, sharp drop” after some reports that the Russian Deputy Prime Minister Novak said that oil demand was expected to rise by 5.8 to 6 million barrels a day in 2021 said Phil Flynn, senior market analyst at The Price Futures Group.

But Novak also reportedly said that Russia had the ability to raise production beyond the OPEC+ limits, Flynn told MarketWatch. “The market took that as a sign that maybe Russia won’t go along with being restricted by the cartel, but I think that’s a false assumption at the same time.”

The Organization of the Petroleum Exporting Countries and its allies, a group collectively known as OPEC+, are expected to make a decision today on production going forward.

The group agreed earlier this year to unwind production cuts, boosting output in monthly increments of 400,000 barrels a day. The Biden administration subsequently pressed the group to further increase output.

See: To pause or not to pause oil output increases is the question OPEC+ faces as it meets Wednesday

“There are some rumors that Iraq might want to cause some problems at the meeting today, so it’s possible that a rubber stamp of the production increase might not go as smoothly again,” said Flynn, emphasizing that this is all “speculation.”

Market participants were also dealing with the effects of Hurricane Ida which hit the U.S. Gulf Coast last Sunday and temporarily disabled swaths of production and oil refineries in the region.

West Texas Intermediate crude for October delivery
CLV21,
-1.07%

fell 75 cents, or 1.1%, lower at $67.75 a barrel, after the contract for U.S. benchmark oil fell 1% on Tuesday on the New York Mercantile Exchange.

In August, prices for the front-month contract ended 7.4% lower, the first monthly loss since March, according to Dow Jones Market Data.

Meanwhile, global benchmark November Brent crude
BRNX21,
-0.91%

 
BRN00,
-0.91%

fell 78 cents, or 1.1%, at $70.85 a barrel, following a 0.6% decline in the session before, which contributed to its monthly loss of 4.4%.

The Energy Information Administration on Wednesday reported that U.S. crude inventories fell by 7.2 million barrels for the week ended Aug. 27.

That was larger than the average decline of 4.4 million barrels expected by analysts polled by S&P Global Platts. The American Petroleum Institute on Tuesday reported a roughly 4 million-barrel decline, according to sources.

Crude inventories showed a “solid draw” despite production actually ticking higher,” said Matt Smith, director of commodity research at ClipperData. The numbers are “not yet reflective of the impact of Hurricane Ida on Gulf of Mexico production,” he said.

“Exports were stronger, aiding the draw — tag-teaming with refining activity at just under 16 million barrels per day to be strong enough to overpower a tick higher in imports and production,” he told MarketWatch.

The EIA reported a weekly inventory increase of 1.3 million barrels for gasoline, while distillate stockpiles declined by 1.7 million barrels. The S&P Global Platts survey forecast supply declines of 1.8 million barrels for gasoline and 500,000 barrels for distillates.

The EIA data also showed crude stocks at the Cushing, Okla., storage hub edged up by 800,000 barrels for the week.

On Nymex, October gasoline
RBV21,
-1.94%

edged down by 2.2%, to nearly $2.10 a gallon, following a 0.6% decline a day ago, while October heating oil
HOV21,
-1.04%

shed 1.3% to $2.10 a gallon.

Ahead of the key meeting for major producers, crude-oil watchers aren’t expecting any major changes to OPEC+’s output plans and a number of analysts believe that even with an increase in production, oil inventories will see a drawdown this year as demand recovers from the pandemic.

“OPEC is expected to stick to the production revival plan, as even with OPEC adding 400,000 barrels each day to the end of this year, the fuel stockpiles will decline by more than 800,000 barrels in average. That’s good news for the oil bulls,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a daily research note.

That said, he cautioned that the global crude market could return to a glut by 2022 and remain that way for a year.

“So that to me is a strong hint that we don’t have much upside potential above the $70 pb in US crude, unless we see a surprise action taken by OPEC one of these days, the analyst wrote.

Meanwhile, traders continue to watch the recovery efforts for Gulf Coast refinery operations in the wake of Hurricane Ida, with an estimated that 93.69% of current oil production in region shut in, along with 94.47% of natural-gas production, according to the Bureau of Safety and Environmental Enforcement on Tuesday.

Natural-gas futures for October
NGV21,
+4.50%

were trading 25.3 cents, or 5.8%, higher at $4.63 per million British thermal units, following a 1.7% gain on Tuesday.  

Natural-gas prices are “pushing towards yet another multi-year high on expectations of another smaller-than-normal storage injection, and on reports that offshore gas production may take weeks to fully recover” from Hurricane Ida, said Christin Redmond, global commodity analyst at Schneider Electric, in a market update.

On average, analysts expect the EIA on Thursday to report an increase 20 billion cubic feet in natural-gas supplies for the week ended Aug. 27, according to a poll conducted by S&P Global Platts. That would measure less than the five-year average build of 53 Bcf, S&P Global Platts said.

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