Oil analysts predict a prolonged rally as OPEC resists calls to ramp up supply
Oct 06, 2021
- OPEC and non-OPEC partners, a group collectively referred to as OPEC+, said Monday that it would stick to its existing pact for a gradual increase in oil supply.
- The group’s decision on production policy had been widely expected, although some had hoped pressure from the U.S. and India to tame soaring oil prices might have been enough to persuade the group to offer more supply.
- “The market is full of confidence,” Tamas Varga, senior analyst at PVM Oil Associates, said in a research note on Tuesday. “The question is whether this optimism is justified or not.”
Oil prices climbed to multi-year highs shortly after a group of some of the world’s most powerful oil producers opted against a big supply boost.
Now energy analysts believe crude prices could be poised to rally toward $100 a barrel.
OPEC and non-OPEC partners, a group collectively referred to as OPEC+, said Monday that it would stick to its existing pact for a gradual increase in oil supply.
OPEC+ said it had “reconfirmed the production adjustment plan” in a statement published online shortly after relatively swift ministerial talks. This referred to its previously agreed decision to add 400,000 barrels per day to the market for the month of November.
The group’s decision on production policy had been widely expected, although some had hoped pressure from the U.S. and India to tame soaring oil prices might have been enough to persuade the group to offer more supply.
International benchmark Brent crude futures traded at $81.74 a barrel on Tuesday morning, up more than 0.5% for the session, while U.S. West Texas Intermediate futures stood at $77.92, roughly 0.4% higher.
Brent futures gained 2.5% to close at $81.26 on Monday, notching its highest settle for three years. WTI rose 2.3% to end the previous session at $77.62, reaching its highest settle in almost seven years.
Both oil contracts are up around 60% since the start of the year.
“The market is full of confidence,” Tamas Varga, senior analyst at PVM Oil Associates, said in a research note on Tuesday. “The question is whether this optimism is justified or not.”
OPEC+ agreed in July to raise output by 400,000 barrels a month until at least April 2022 in order to phase out 5.8 million barrels per day of existing output cuts.
The recovery in global oil demand from the coronavirus pandemic has been quicker than many expected, while global supply has been disrupted by hurricane outages and low investment.
While Brent trading above $80 “might feel toppy,” Varga said prices are “only seen uncomfortably high until the first cold spell arrives in the Northern Hemisphere, creating additional demand and triggering a fresh bout of buying.”
In the short term, Varga said the current backdrop suggests “there is still room on the upside.”
$100 oil?
U.S. President Joe Biden’s administration has previously called on OPEC and its allies to boost oil output to tackle soaring gasoline prices. The move came amid concerns that rising inflation could derail the economic recovery from the coronavirus pandemic.
India, another big oil consumer, has also pushed for OPEC to consider more supply to ensure prices suit both producers and consumers.
Kieran Clancy, commodities economist at Capital Economics, acknowledged pressure had been growing on OPEC+ to return supply to the market more rapidly. “We think that their refusal to do so means that the market will remain in a deficit in Q4, which suggests that oil prices will remain elevated for at least the remainder of this year.”
Perhaps the more important question, Clancy said, “is whether OPEC+ will even be able to meet these less ambitious targets.”
“OPEC managed less than half of its planned increase in production in August [the latest available data], largely due to disruptions to operations in Angola and Nigeria. And if output continues to fall short of the group’s targets, oil prices could remain high into next year as well.”