Analysts see protracted rally as OPEC sticks to plan

LONDON – Oil prices hit multi-year highs shortly after a group of some of the world’s most powerful oil producers opted against a sharp increase in supply.

Now, energy analysts believe crude prices may be on the verge of climbing back to $ 100 a barrel.

OPEC and non-OPEC partners, a group collectively referred to as OPEC +, said on Monday 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 posted 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 was widely anticipated, although some hoped that pressure from the United States and India to contain the spike in oil prices would have been enough to persuade the group to offer more supply. .

International benchmark Brent crude futures traded at $ 81.74 per barrel on Tuesday morning, up more than 0.5% for the session, while US West Texas Intermediate futures United was $ 77.92, about 0.4% higher.

Brent futures gained 2.5% to close at $ 81.26 on Monday, hitting their highest level in three years. WTI rose 2.3% to end the previous session at $ 77.62, hitting its highest level in nearly seven years.

The two 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 Tuesday in a research note. “The question is whether this optimism is justified or not.”

OPEC + agreed in July to increase production by 400,000 barrels per month until at least April 2022 in order to phase out 5.8 million barrels per day of existing production cuts.

The recovery in global demand for oil from the coronavirus pandemic has been faster than expected, while global supply has been disrupted by hurricane blackouts and weak investment.

While Brent trading above $ 80 “might look scorching,” Varga said prices “are only uncomfortably high until the first cold snap hits the northern hemisphere, creating additional demand and triggering a new wave of purchases “.

In the short term, Varga said the current environment suggests “there is still room for upside.”

The administration of US President Joe Biden has previously called on OPEC and its allies to increase oil production to deal with soaring gasoline prices. The move came amid fears that rising inflation could derail the economic recovery after the coronavirus pandemic.

India, another large consumer of oil, has also pushed OPEC to consider a larger offer to ensure prices are suitable for both producers and consumers.

Kieran Clancy, a commodities economist at Capital Economics, admitted that the pressure had increased on OPEC + to get supply back to the market more quickly. “We believe their refusal to do so means the market will remain in deficit in the fourth quarter, suggesting that oil prices will remain high for at least the remainder of this year.”

Perhaps the most important question, said Clancy, “is whether OPEC + will even be able to meet these less ambitious goals.”

“OPEC managed less than half of its expected production increase in August [the latest available data], in large part due to disruptions to operations in Angola and Nigeria. And if production continues to fall short of group targets, oil prices could also remain high next year. “

Bank of America Global Research analysts last month said the bank could advance its oil price target by $ 100 a barrel if temperatures are colder than expected during the winter, according to Reuters. This prospect, analysts say, could lead to increased demand and widen a supply deficit.

Meanwhile, Goldman Sachs analysts recently raised their forecast for year-end Brent prices to $ 90 a barrel from $ 80, citing a faster-than-expected recovery in global demand.

“OPEC members do not appear to view rising prices as a critical issue at the moment,” energy analysts at risk consultancy Eurasia Group said in a research note. “However, Saudi Arabia’s largest exporter has started to reduce its official selling price to its major customers, which should allay concerns about Brent crude oil futures reaching or exceeding $ 80 per barrel.”

On the demand side, energy analysts at Eurasia Group have said that China’s industrial slowdown, the collapse of real estate giant Evergrande, mounting inflationary pressure and Covid-19 disruptions around the world could all undermine growth. of oil demand over the next 12 months.

In the short term, a repeat of a cold winter in the northern hemisphere “could cause major energy supply shortages in many major industrial centers,” they added.

Eurasia Group sees Brent crude prices at $ 75 a barrel through the end of the year, with the oil contract set to drop to $ 67 next year.