Crude market on edge ahead of OPEC meeting

How OPEC producers respond to the US-led decision to release strategic oil reserves is shaping up as a wildcard ahead of the cartel’s meeting soon.

A crude oil pipeline at the US Department of Energy’s Strategic Petroleum Reserve in Freeport, Texas. Picture: Bloomberg

How OPEC+ responds to the US-led decision to release strategic oil reserves to cap the price of crude and inflation is shaping up as a wildcard ahead of the cartel’s meeting early next month.

With inflation looming as a potential headwind for the US sharemarket at a time when China’s economic growth is slowing and European demand may falter amid renewed Covid outbreaks, the crude oil price may be a key driver of the global financial markets before the year end.

The Wall Street Journal said top oil producers Saudi Arabia and Russia were considering a move to pause their recent efforts to provide the world with more crude after the US and five other nations agreed to release as much as 70 million barrels from reserves after crude prices surged to multi-year highs.

But Reuters said the cartel wasn’t discussing a pause despite the US and others releasing stocks.

The UAE and Kuwait said a pause was not needed. Analysts were divided.

OPEC+ will meet next Thursday and Friday to decide whether to continue its monthly increase of 400,000 barrels a day to supply, which is now at 3.8 million barrels and below pre-pandemic levels.

So far it has been a case of “sell the rumour, buy the fact” as the increase was less than expected.

After hitting three-year high of $US86.70 a barrel last month, the global benchmark Brent crude oil fell 11 per cent to a two-month low of $US77.58 on expectations of strategic oil releases and the growing threat to oil demand from worsening Covid outbreaks and travel restrictions in Europe.

But the crude oil price rose as much as 5.1 per cent to $US83 after President Biden’s announcement.

Citigroup commodity analysts, led by Edward Morse, predicted OPEC+ would stick to its scheduled supply increase for January. Reducing quotas would be an overreaction with crude oil around $US80 a barrel as it would clearly erode OPEC’s claim of providing public good by stabilising oil markets.

They noted that the actual monthly output increases by OPEC+ were typically only about 250,000-300,000 barrels a day as some producers were unable to meet production quotas.

This month, the cartel will only produce about 39 million barrels a day – 650,000 less than its current quota of 39.7 million, based on preliminary cargo tracking data, Citi said.

But according to ANZ, OPEC+ is likely to suspend its scheduled 400,000 barrels a day increase as the release of oil from strategic reserves ramps up competition for control of the oil market among the world’s biggest producers.

“We don’t expect OPEC will stand by idly as the market enters a critical period,” said ANZ commodity strategist Daniel Hynes.

A decision to suspend the next increase due in January would buffer the market from headwinds to demand, such as renewed travel restriction as a new wave of the pandemic hits Europe and the US.

“This would see the market in deficit in the March quarter and likely support Brent crude prices at $US80 a barrel,” Hynes said.

The outcome of next week’s OPEC meeting is likely to be crucial to the near term effectiveness of the reserve releases, according to RBC’s head of global commodity strategy, Helima Croft.

But she said the US administration was looking to keep prices below $US80 and believed it had the ability to do another release of similar magnitude through the exchange mechanism.

“They are keenly focused on reducing gasoline and diesel prices ahead of the holidays, but also see this as part of a broader strategy to deal with inflationary pressure and supply chain challenges,” she said.

“While staying the course is our base case for next week’s meeting, we do not rule out the possibility that Saudi Arabia might actually call for scaling back the OPEC production increase in response to today’s co-ordinated action, given the reported remarks by the IEF secretary general.

“However, we think several Gulf states with close ties to the US would oppose such action fearing the political blowback from Washington.”