Oil Prices Rise on Expectation OPEC+ Will Rollover Production Cut
Oil prices rose on Wednesday on expectations that the Organisation of Petroleum Exporting Countries (OPEC+) producers might decide against increasing output when they meet this week.
It was observed that signs of progress in the coronavirus vaccine rollout in the United States gave oil market a further support.
Today, Brent crude price jerked up $1.28, or two per cent, to $63.98 a barrel by early in the morning. In the same vein, U.S. West Texas Intermediate (WTI) crude rose $1.17, or two per cent, to $60.92 a barrel.
“The fundamentals of the oil market suggest further strength as oil demand grows with the recovery and leisure and travel activity is likely to bounce,’’ said Norbert Rücker, an analyst at Swiss bank Julius Baer.
“We see oil prices pushing temporarily above $70 by mid-year,’’ he added.
Oil prices jumped after Reuters reported based on three sources that the Organisation of the Petroleum Exporting Countries, Russia and their allies, a group known as OPEC+, are considering rolling over production cuts from March into April rather than raising output.
The group is expected to meet on Thursday.
The market had been widely expecting OPEC+ to ease production cuts. Kuwaiti Oil Minister, Mohammad al-Fares, said the oil market was being supported by optimism about vaccinations.
U.S. President Joe Biden said the U.S. would have enough COVID-19 vaccines for every American adult by the end of May after Merck & Co agreed to make rival Johnson & Johnson’s inoculation.
Biden said he hoped that the U.S. would be “back to normal” at this time next year and potentially sooner.
The American Petroleum Institute (API) industry group reported U.S. crude stocks rose by 7.4 million barrels in the week to Feb. 26, in stark contrast to analysts’ estimates for a draw of 928,000 barrels.
However, that build occurred while U.S. refining capacity was shut during the survey week because of cold weather in Texas. Refinery runs fell by 1.75 million bpd, API data showed.
Experts believe that the upcoming OPEC+ meeting, slated for Thursday, will test the group’s ability to overcome chronic supply and demand imbalances that have plagued the global oil sector since the emergence of the COVID-19 pandemic approximately one year ago.
After price slumps for months due to pandemic-driven demand destruction, oil has finally rebounded to pre-pandemic levels and become an attractive commodity again with the help of a better but still uncertain oil demand recovery.
However, the elephant in the room is now “supply” and members of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries including Russia, dubbed as OPEC+, are expected to either continue with previous high-level output cuts or raise cuts further in line with rising oil prices during the 14th ministerial meeting of OPEC+ on March 4.
Recalled that in January, Saudi Arabia announced a two-month unilateral cut to its crude oil production for February and March in addition to its OPEC+ commitments.
The group cut 8.125 million barrels per day (bpd) for February and reduced it to 8.05 million bpd in March.
Reacting to the tightening, oil prices responded positive with significant gains in February, both benchmarks increased by more than 15%.
Market observers saw the production cuts as the right move and a timely response to oversupply concerns.
This, analysts appear unsure whether the group will decide during the meeting on Thursday to extend the production quota into April, as producers may want to benefit from high oil prices.
OPEC+ meeting schedule for March 4 comes amid rising tensions between Washington, Riyadh and Tehran.
Yesterday: Oil Prices Slide on Expectation of Overweight Supply
Oil prices slipped ahead of the Organisation of Petroleum Exporting Countries meeting, weak China demand and rising output from Venezuela.
Concern rises Tuesday as producers would likely agree to raise oil supply at OPEC meeting this week, thus weighed on sentiment.
Brent crude dropped 24 cents, or 0.4 per cent, to $63.45 a barrel this morning, after losing 1.1 per cent the previous day.
U.S. West Texas Intermediate (WTI) crude fell 18 cents, or 0.3 per cent, to $60.46 a barrel, having lost 1.4 per cent on Monday.
They both touched the lowest in more than six days, extending losses that started late last week.
Expectations that the Organisation of the Petroleum Exporting Countries and its allies, a group known as OPEC+, would boost oil output from April are pushing prices lower.
“The clamour among some members to refill their coffers, is likely to be a more powerful force than complaints externally about tight supplies.
In the interests of OPEC+ discipline, the Saudi’s are likely to accede,’’ said Jeffrey Halley, senior market analyst at OANDA.
“With the speculative market heavily long, the past three sessions’ falls look corrective ahead of Thursday’s meeting.’’
The group meets on Thursday and could discuss allowing as much as 1.5 million barrels per day (bpd) of crude back into the market.
OPEC oil output fell in February as a voluntary cut by Saudi Arabia added to reductions agreed to under the previous OPEC+ pact, a Reuters survey found, ending a run of seven consecutive monthly increases.
China’s factory activity growth slipped to a nine-month low in February, which may curtail Chinese crude demand and pressure oil prices while oil buying from the world’s top importer has already eased lately.
“There are signs that the physical market is not as tight as futures markets suggest,’’ ING Economics said in a note.
“Chinese buying is reportedly easing, with demand expected to be weaker as we go into Q2 for refinery maintenance.’’
In February, oil prices trend higher with both benchmarks increasing by more than 15% to reach pre-pandemic levels.
It is noted that the OPEC+ decision to incrementally increase output along with Saudi Arabia’s massive 1 million-barrel-per-day (bpd) production cut pledge in February and March were timely responses to oversupply concerns.
However, as planned in the December meeting, the group will convene on March 4 to decide on the production quota after March.
According to some reports citing OPEC sources, the group could add half a million more barrels to the market in conjunction with an output rebound of 1 million bpd from Saudi Arabia.
Although group members want to benefit from high oil prices, earlier in February, OPEC’s de facto leader Saudi Arabia’s Energy Minister Abdulaziz bin Salman warned the group against complacency.
Adding more to supply concerns, OPEC member Venezuela, which was exempted from the production cuts due to US sanctions, increased its production in February.
The country pumped over 700,000 bpd in February, the highest level in the last 10 months.
On the demand side, oil demand from the world’s second-largest oil consumer, China, is expected to decline in line with the country’s factory activity growth, which dropped to nine-month lows.