Oil Rally Continues On Eve Of OPEC+ Meeting – OpEd
By Arab News
By Dr. Namat Al-Soof *
On the first trading day of October and the last trading day of the week, oil prices moved to growth, with Brent trading above $79 a barrel and West Texas Intermediate near $76 a barrel. Despite the weakness of growth momentum against the backdrop of a strong dollar and mixed results on inventories from the US Department of Energy, prices have risen by 2.5 to 3.3 percent for the week. At the same time, in September, Brent and WTI prices rose by 7.3 and 8.4 percent, respectively.
Overall, oil prices last month were supported by fears of supply disruptions due to hurricanes in the Gulf of Mexico, signs of a recovery in demand and a decline in US inventories. In addition, the rally is fueled by the idea that the oil market deficit will last longer, as production in a number of countries will not be able to be restored quickly enough to meet growing demand, due to underinvestment last year.
For now, the focus will shift towards the OPEC+ meeting, scheduled for Oct. 4, where the group will decide on oil production policies for November. In the baseline scenario, the group members will increase production by 0.4 million barrels per day, but some sources report that a more substantial increase is also being considered.
The reason for this decision may be the current situation in the coal and natural gas markets. As a result of a significant rise in prices for these energy sources, oil demand in the fourth quarter may be even higher than expected in September forecasts. Some consumers are already starting to switch from gas to fuel oil and diesel generation to save money where possible. This trend has already spread in Pakistan and Bangladesh, as well as in a number of countries in the Middle East. Because of this, the oil deficit may worsen, which will put additional upward pressure on prices. For consumers, in turn, who did not budget for such high prices, this can be very painful, especially given that the current price level negatively affects the margins of enterprises and final consumers.
It is worth mentioning that the White House’s concern about high oil prices was on the agenda of a meeting between Crown Prince Mohammed bin Salman and US National Security Adviser Jake Sullivan.
However, despite market concerns and high prices, the OPEC+ Joint Technical Committee last Wednesday left its forecast for demand growth for 2021 unchanged at 5.95 million barrels per day and kept the forecast for oil shortages at 1.1 million barrels per day. But in 2022, the JTC reduced the expected level of oversupply from 1.6 to 1.4 million barrels per day.
Thus, it is now quite difficult to say with certainty what decision OPEC+ will make at the next meeting. The members of the group have arguments both in favor of maintaining the status quo and a scenario with a more aggressive increase in oil production, given the pressure of high prices on consumers. In the case of the first scenario, oil prices may for some time gain a foothold above $80 per barrel, given the positive sentiment of players on the existing balance of supply and demand in the market.
In the second scenario, the market players do not exclude a price correction for Brent to the levels of $73-75 per barrel. Such a decision will not only mean higher-than-expected levels of production before the end of the year, but will also signal the group’s flexibility and readiness to add more oil to the market if necessary. At the same time, the $80 a barrel mark may become a strong resistance level, near which the market will expect actions from OPEC+.
In conclusion, the positive sentiment in the market will continue to support oil prices. Demand is expected to remain strong and COVID-19 outbreaks will not have a significant impact on the pace of economic recovery. OPEC+ will continue to be the main player on the supply side, as the group holds more than 9 million barrels per day of spare oil production capacity, making it effectively the strongest decision-maker of the global oil market. Therefore, OPEC+ action is the variable that will define the direction of the oil price in the coming months.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.