Opec+ tries novel strategy to boost oil prices

Group is borrowing from the playbooks of central banks

On the surface, it’s the old Opec strategy of production cuts. Opec+ agreed to a one-month extension of its record output cuts and adopted more stringent methods to ensure members don’t break their production pledges.

But a closer look shows subtle changes that point to Saudi Arabia, Russia and their Opec+ allies adopting a more sophisticated approach: trying to flip the shape of the oil price curve upside down.

Focusing on the curve

In many respects, the group is borrowing from the playbooks of the world’s top central banks, where policy makers often focus on the interplay between long- and short-term interest rates. The alliance has traditionally targeted a reduction in inventories. But now it’s also actively focusing not just on stockpiles but also on the shape of the oil curve.

The idea within Opec+ is to try to push near-term, or spot prices, higher than forward contracts, a structure known among traders as backwardation, the delegate said. In short, Opec wants oil today to be more sought after than oil for delivery months or years in the future, encouraging refiners and traders to take crude out of inventories. There are signs Opec+ is adopting a more nuanced policy approach, extending its deep output cuts by a single month, rather than committing to a longer period.

“This marked a departure from previous aims to draw down inventory, a more subtle way of communicating it,” Eagle Commodities Brokers Ltd, an oil brokerage, said in a note.