Oil Prices Rally Over 2% Amid Anticipation of OPEC+ Supply Cut Announcement
Oil prices experienced a significant surge of more than 2% on Monday as speculation over additional supply cuts in OPEC+ production intensified. Market watchers anticipated that member countries would announce further reductions in output following an upcoming meeting early next week. Brent crude futures settled up at $82.32 per barrel, marking a 2.1% increase, while West Texas Intermediate (WTI) crude also rose, with the December front-month contract expiring at $77.60 per barrel, up 2.3%.
After enduring four consecutive weeks of decline, oil prices saw a rebound on Friday, driven by profit-taking and reports from three OPEC+ sources suggesting that the producer group, which includes the Organization of the Petroleum Exporting Countries (OPEC) and allies such as Russia, is considering the implementation of additional supply cuts during their meeting on November 26. The timing of this news proved to be favorable, according to John Kilduff, a partner at Again Capital LLC, who remarked, The OPEC commentary signaling further cuts came right on cue. However, Kilduff also expects any cuts made to be modest, observing that Saudi Arabia has already significantly reduced production levels.
Goldman Sachs, on the other hand, remains open to the possibility of deeper cuts. Given the decline in speculative positioning, the fall in timespreads, and higher-than-anticipated inventories, the investment bank believes it would be unwise to rule out further reductions. Nonetheless, oil prices have already fallen by nearly 20% since late September, largely driven by record-high crude output in the United States, the world’s leading producer, as well as concerns surrounding demand growth, particularly in China, the largest oil importer globally.
Last week, inter-month spreads for Brent and WTI entered into a contango situation, a scenario in which prompt barrels are cheaper than those in future months, indicating an abundance of supply. Traders have also been closely monitoring signs of potential demand destruction resulting from a potential U.S. recession in 2024, as well as taking into account Walmart’s recent warning about potential deflation. Furthermore, the ongoing conflict between Israel and Hamas has raised concerns among some OPEC+ members about the possibility of regional escalation and its impact on oil flow.
As the OPEC+ meeting scheduled for Sunday approaches, Andrew Lipow, president of Lipow Oil Associates, predicts that member countries will prioritize discussions surrounding supply and demand, rather than resorting to using crude oil as a weapon against the United States, which has been supportive of Israel in the ongoing conflict. Lipow suggests that the participating nations, deeply concerned about the war potentially escalating into a broader regional conflict, are eager to ensure the uninterrupted flow of oil.
In conclusion, oil prices have witnessed a significant rally of over 2% in response to expectations of OPEC+ implementing further supply cuts. While the market remains uncertain about the extent of these cuts, Goldman Sachs has not ruled out the possibility of deeper reductions. However, factors such as high crude output in the U.S. and concerns over demand growth from China have contributed to the recent decline in oil prices. The outcome of the upcoming OPEC+ meeting will be crucial in determining the direction of oil prices in the coming weeks.
