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Major output cut expectations uptick global crude prices ahead of OPEC+ meet

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Oil prices rose on Tuesday as expectations that OPEC+ may agree to a large cut in crude output on Wednesday offset concerns about the global economy. Brent crude was up 64 cents, or 0.7%, to $89.50 per barrel by 0823 GMT after gaining more than 4% in the previous session. U.S. crude futures rose 46 cents, or 0.6%, to $84.09 a barrel, having gained more than 5% in the previous session. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known collectively as OPEC+, is expected to cut output by more than 1 million barrels per day (bpd) at their first in-person meeting since 2020 on Wednesday, according to OPEC sources.

Also Read: Petrol, Diesel Price Today, 4 October 2022: Fuel prices unchanged; check rates in Delhi, Mumbai, other cities

OPEC+ has boosted output this year after record cuts put in place in 2020 when the pandemic slashed demand. But in recent months, the organisation has failed to meet its planned output increases, missing in August by 3.6 million bpd. The production target cut being considered was justified by the sharp decline in oil prices from recent highs, said Goldman Sachs, adding that this reinforced its bullish outlook on oil. Oil prices have dropped for four straight months as COVID-19 lockdowns in top oil importer China curbed demand while interest rate hikes and a soaring U.S. dollar pressured global financial markets.

Major central banks have embarked on the most aggressive round of rate rises in decades, sparking fears of a global economic slowdown. However, Swiss lender UBS said going into the year-end it saw several bullish factors that could send crude prices higher, including “recovering Chinese demand, OPEC+ further supply cut, the end of the U.S. Strategic Petroleum Reserve (SPR) release and the upcoming EU ban on Russian crude exports.” U.S. crude oil stocks were estimated to have increased by around 2 million barrels in the week to Sept. 30, a preliminary Reuters poll showed on Monday.

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MCX Crude oil October futures to trade in Rs 6400-7300/bbl range this week; OPEC+ meeting eyed

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By Royce Varghese

WTI Crude oil futures fell for the fourth consecutive month in September, down by more than 11% and closed below $80 per bbl, pressured by mounting fears of a demand-sapping global recession. The black gold also witnessed the first quarterly decline in 2 years and down more than 25% in the previous quarter, giving away all the war premium, on fears of demand destruction from aggressive central bank tightening and a surging dollar index.

Also Read: Petrol, Diesel Price Today, 4 October 2022: Fuel prices unchanged; check rates in Delhi, Mumbai, other cities

US shale production is not rising significantly despite a government push to increase the output. Crude output was mostly hovering near 12.1 mbpd in September, however, it fell to 12.1 mbpd in the previous week. Inflation and supply-chain delays play a major role in hampering production and expansion.

Outlook: OPEC+ set to deliver the biggest output cut since the pandemic

Oil prices might have bottomed for now as supply concerns are going to rise in the coming months. OPEC+ alliance is considering slashing production by more than 1 million barrels a day to revive plunging prices when it meets on 5th October. A reduction of that magnitude would be the biggest since the pandemic and might put a floor on oil prices. The OPEC+ gathering in Vienna will be the cartel’s first in-person meeting since the pandemic. In addition, ministers plan to hold a press conference after their session.

US SPR release is also nearing an end in late October, which accounted for almost 1 mbpd of global supply since May. Together, halting SPR release and output cut from OPEC+ might add to more than 2% of global output, which is going to vanish from November onwards. Chinese demand might also increase as few Chinese state oil refineries consider increasing runs by up to 10% in October, on prospects of more robust demand and a possible surge in fourth-quarter fuel exports.

Also Read: Aggressive monetary tightening by RBI continues: Can NBFCs stay resilient?

Having said that, US Labour market data can be closely watched for more cues on Fed’s rate hike path. In case data surprises on the upside, we might see a dollar rally on prospects of aggressive rate hikes from the Fed, which might limit the upside in oil prices. We expect MCX Crude oil October futures to trade in the range of Rs 6,400 – 7,300 per bbl for the week, with an upward bias.

(Royce Varghese, Fundamental Analyst, Currency & Energy, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)