OPEC+ cuts that steadied market now bring risk of $100 crude

Oil’s rise toward $100 a barrel is exposing some of the risks in OPEC+’s production cuts.

For about a month, the group’s decision appeared to fulfill its stated aim of stabilising oil markets, with crude prices steadying against a deteriorating backdrop for fuel demand.

Now, at the mid-point between the October 5 OPEC+ meeting and the group’s next gathering in December, prices have moved close to triple digits again.

“I think OPEC+ is super-happy with stabilising Brent in the $90s,” said Helge Andre Martinsen, senior analyst at DNB Bank in Oslo. But “there is a real risk of over-tightening in the next three-to-five months.”

Brent rose to a two-month high of $99.56 a barrel on Monday, before paring gains. The January futures contract retreated 1 per cent to $96.90 a barrel as of 11.15am in London on Tuesday, November 8.

Economic weakness
Oil demand has proved to be “significantly lower” than expectations, according to Russell Hardy, chief executive of Vitol Group, the world’s biggest independent crude trader. Demand in China, the world’s biggest oil importer, is unlikely to recover from strict pandemic lockdowns until the second half of 2023, Hardy said in a Bloomberg television interview.

“We’re in a world where demand is sloshing downward,” said Ed Morse, head of commodities research at Citigroup. “There’s ample supply in the market.”

Instead of the potential shortage that was being predicted a few months ago, global markets now faced a surplus this quarter, according to OPEC Secretary-General Haitham al Ghais.

Price differentials in key Asian markets have deteriorated as China re-confirmed its tough anti-Covid measures. The International Monetary Fund has warned that “the worst is yet to come” for the global economy.

The OPEC+ supply cuts, which started this month, anchored crude near $95 a barrel, high enough to buoy revenues for the coalition’s 23 members but not the excessive spike that many politicians had predicted.

Time spreads for Brent – the price differentials between monthly futures contracts that are seen as a gauge of supply and demand – have remained stable.

“From the viewpoint of someone wanting to be preemptive about the balances, you would probably be happy you cut when you did,”said Paul Horsnell, head of commodities research at Standard Chartered Bank.

Flirting with $100
In recent days, however, oil prices have gained momentum. Tentative signs of re-opening in China pushed prices higher on Friday, and the advance continued on Monday.

Oil inventories are significantly below average levels, and global markets are poised to tighten further in coming months with the planned imposition of European Union sanctions on Russian oil exports.

“Brent is flirting with $100 again,” said Christof Ruhl, senior analyst at Columbia University’s Center on Global Energy Policy. “That’s exactly where no one in consuming countries – from central banks fighting inflation or finance ministries preventing recession – wanted to see it.”

The OPEC+ alliance is next due to meet on December 4, a day before the EU embargo on Russian oil takes effect. The tension between the two countervailing forces of weakening demand and tightening supply may dominate proceedings.

“More than 90 per cent of US chief executives believe a recession is on the horizon,” said Jeff Currie, head of commodities research at Goldman Sachs Group. At the same time, “OPEC+ is trying to preempt the downfall in demand for the first time in its history” and has “the option to reverse if it doesn’t materialise.”