Oil prices continued to rise on Tuesday; a day after the OPEC+ meeting kept its supply comeback plan unchanged; with traders pricing in further the tight market conditions. The OPEC+ grouping consists of Organization of the Petroleum Exporting Countries (OPEC), Russia and their allies.
OPEC+ said on Monday it would stick to an existing pact for a gradual increase in oil output; sending crude prices to three-year highs and adding to inflationary pressures; consuming nations fear will derail an economic recovery from the pandemic.
The OPEC+ have faced calls for from big consumers; such as the United States and India, for extra supplies after oil prices surged more than 50% this year.
OPEC+ “reconfirmed the production adjustment plan”; the group said in a statement issued after online ministerial talks, referring to a previously agreed deal; under which 400,000 barrels per day (bpd) would be added in November.
An OPEC+ source had told Reuters shortly before Monday’s ministerial talks that the group had faced pressure to ramp up production faster; but added: “We are scared of the fourth wave of coronavirus; no one wants to make any big moves.”
The group agreed in July to boost output by 400,000 bpd a month until at least April 2022 to phase out 5.8mn bpd of existing production cuts; already much reduced from the huge curbs that were in place during the worst of the pandemic.
Tight supply picture in November and December.
Demand bounced back swiftly; while supply has been disrupted by factors that include hurricanes that have hammered US production; and low levels of investment across the industry during the depths of the pandemic when demand cratered.
The confirmation that OPEC+ would keep a cap on supply; instead of feeding the market with even more product and bringing it towards a closer equilibrium; drove traders into a buying frenzy for front-month Brent contracts, as the decision guarantees a tight supply picture in November and December.
“Is the growing oil price becoming an unpredictable bubble? Traders are certainly considering when, and at what threshold, a price ceiling will begin to formulate,” asked Rystad Energy’s Senior Oil Markets Analyst Louise Dickson.
And Dickson answered by stating, “The tight market was not met by any extra supply relief from OPEC+, which adds fuel to the supply-constrained oil price rally; but the spectacular third quarter rally can only be repeated in coming months should unusual circumstances — either climate events or unplanned supply outages — strike again.
More clear signals on the winter weather risks
“Otherwise, the steady increase of OPEC+ volumes will gradually bring oil prices out of their deep backwardation.
“OPEC+ producers will definitely be monitoring how the high prices affect sales; and also how the market balances evolve through the end of the year, so we expect more ‘action’ from OPEC+ at the December meeting, once there are more clear signals on the winter weather risks and associated upside risk to oil demand.”
For now, OPEC+ has not come to the supply rescue, but at the same time; it hasn’t pulled the supply floor out from under the market. However, the market reaction is one of the strongest to essentially an already-known market outcome —that OPEC+ would stick to its chartered incremental tapering plan, Dickson said.
“The market took the good news it was waiting for and ran with it. At the same time it is a market ripe with risk and many unknowns; and it has already demonstrated its capacity for speculation even at the slightest macro queues.
“How fast COVID recovery plays out, how cold winter is; and how financial and money markets develop in the coming months can all tip the oil price scale, Dickson added.
Dickson said, traders are seeing no emergency action from the supply side to quell rising oil prices. And are also adding value on the expectation that strong oil demand will materialize in the coming quarter.
“As oil gets pricier by the day; buyers need to reassess how they react to such a sustained and upward cycle; never witnessed since the so-called commodity ‘super-cycle’ days of 2008 and 2011,” she added.