Opec+ output hike gamble pays off as oil prices recover

[LONDON] The gamble taken by the Organization of the Petroleum Exporting Countries and its allies (Opec+), under pressure from top oil consumer the United States, to raise oil output in January despite its own forecasts of oversupply appears to be paying off as prices stabilise.

Oil has steadied around US$75 a barrel as market participants brush off concerns of a glut, in part because they do not believe Opec+ can reach their new output target. Demand is still expected to rise.

Heading into its Dec 2 meeting, Opec+ had every reason to lower supply. A US-led release of oil from strategic stocks was set to increase the surplus. Oil fell 10 per cent on Nov.26 when reports of the new coronavirus variant emerged and below US$66 on the day of the meeting.

But Opec+ stuck to its guns and went ahead with the nominal monthly increase of 400,000 barrels per day (bpd), taking a view that demand would not be severely hit. Oil's rise since has added to Opec confidence that there will not be a major demand shock.

"The market has taken the decision well," said an Opec delegate. "The variant news made for short-lived negative sentiment, with no clear evidence."

While a new round of movement restrictions as a result of the Omicron variant threatens to impact demand, there has not been a return to the strict limits on travel seen during earlier waves of the pandemic.

At the same time Opec+, which has been unwinding last year's record output curbs through monthly increases, has been under-delivering on the pledges due to a lack of capacity to pump more in some of the alliance's producers.

"The bottom line: everything is good when Brent is quoted at around US$75," said a Russian Opec+ source.

Prices could head even higher in 2022, noted Christyan Malek and other analysts at JP Morgan, who think Opec+ will struggle to add 250,000 bpd a month and forecast US$125 oil next year in a Nov 29 note.

REUTERS