Oil prices are currently ruling at such levels that they carry quite some risk for traders, with today’s wild fluctuation illustrating their fragility and vulnerability to market developments.
As Monday’s OPEC+ policy decision does not relieve the market tightness further in coming months, oil prices continued their stunning rally this morning.
Despite the bullish morning, the API estimate that US crude stocks built last week quickly turned things around, with traders pricing in concern that the rally may be moving too quickly, trimming prices back.
The OPEC+ decision was made quickly and without much discord. It was a rare occurrence in which Saudi Arabia, Russia, and the UAE were all aligned on a recommendation.
This cautious approach is largely in line with OPEC+ policy since the major cuts were enacted May 2020, as the group prefers to wait on more concrete market signals instead of preemptively flooding the market with too much supply, according to Rystad Energy.
The group is also concerned with downside risk to demand from potential new Covid-lockdowns, not putting all emphasis on the “energy crunch” upside risk from short-term gas-to-oil switching, at least for the time being.
Rising natural gas prices and low inventories have lifted up many commodity prices including oil, and there is a salient risk that a colder than normal winter could send prices even higher.
However, it is still early to definitively forecast a colder than normal winter, so OPEC+ rightly wants to wait another month for a clearer market signal, as a colder winter will further spur oil demand above seasonal patterns included in most forecasts and potentially warrant a stronger supply response.
A supply boost from OPEC+ faces not only group acquiescence, but also a physical and market ability to ramp up oil supply quickly, which we saw some lagging indicators across some OPEC+ producing countries in August and September, which itself was a main contributing factor to the unexpected market tightness.
September 2021 OPEC+ oil supply, for example, likely came in about 500,000 bpd lower than the target production level, as some countries are still falling short of their allotted production quotas.
However, from October onwards, we expect better performance from Kazakhstan as maintenance at Tengiz concludes, as well as from Russia, which saw crude and condensate rise to 10.7 million bpd in September, a slight improvement month on month which if broken down by crude and condensate, puts Russia closer on track to producing at its new OPEC+ quota of 9.9 million bpd crude only for November 2021.
Saudi Arabia was given the same higher quota ceiling for November 2021, and the market will be watching flows from the Kingdom and allocations for signals if the Kingdom chooses to intervene in the market, of which we see limited risk for the time being.
With oil demand seemingly poised to cross the 100 million bpd mark on a more expedited track as Covid-19 restrictions are lifted, the supply response can only be described as lagging.
Much of this slack is due to unforeseen outages such as Hurricane Ida, but there is also a greater lethargy in supply response globally, despite the relatively stable and robust price environment.
The supply crunch has been more pronounced in the crude market, as refiners are still buying ample crude volumes to meet rising gasoline demand, supported by a return to normal pre-Covid 19 levels in Asia and Europe, and still on a strong upward trajectory in North America.
This resurging demand has kept refinery utilization relatively robust and trending above supply, Rystad said.
