The Business Times

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

Published Tue, Nov 8, 2022 · 10:48 PM

OIL’S rise toward US$100 a barrel is exposing some of the risks in Opec+’s controversial production cuts.

For about a month, the group’s decision appeared to fulfil 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 Oct 5 Opec+ meeting and the group’s next gathering in December, prices have moved close to triple digits again, as the seasonal demand peak threatens to coincide with additional sanctions on Russian supplies. 

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

Brent rose to a two-month high of US$99.56 a barrel on Monday (Nov 7), before paring gains. The January futures contract retreated 1 per cent to US$96.90 a barrel as of 11.15 am in London on Tuesday. 

The run-up in prices, coming just as US citizens prepare to vote in midterm elections, threatens to further inflame relations between US president Joe Biden and Saudi Arabia, the cartel’s de facto leader. The president has fiercely criticised Saudi Arabia for the supply curbs, accusing the long-time American ally of abetting fellow Opec+ member Russia in its war on Ukraine. 

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In the weeks following the decision by Opec and its allies to cut output by 2 million barrels a day, the political fallout was intense. But initial trends in crude prices and demand gave some vindication to the strategy, which was spearheaded by Saudi’s energy minister Prince Abdulaziz bin Salman.

Oil demand has proved to be “significantly lower” than expectations, said 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, he said in a Bloomberg television interview.

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

Instead of the potential shortage that was being predicted a few months ago, global markets now face a surplus this quarter, said 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 (IMF) has warned that “the worst is yet to come” for the global economy.  

The Opec+ supply cuts, which started this month, anchored crude near US$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 pre-emptive about the balances, you would probably be happy to cut when you did,” said Paul Horsnell, head of commodities research at Standard Chartered Bank. 

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 (EU) sanctions on Russian oil exports. The ban could slash the country’s output by almost 20 per cent by the start of next year, said the International Energy Agency. 

“Brent is flirting with US$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, to a public that supports Ukraine against Russia – wanted to see it.”

The International Energy Agency has warned that restricting oil output at this time could push fuel costs to levels that could ultimately trigger a global recession.

The Opec+ alliance is next due to meet on Dec 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 pre-empt the downfall in demand for the first time in its history”, and has “the option to reverse if it doesn’t materialise.” BLOOMBERG

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