Oil climbs as Russia talks OPEC output
Plan floated to stall production rise
Oil rose the most in more than three weeks Monday as Russian producers met with Energy Minister Alexander Novak to discuss the possibility of delaying an easing of OPEC Plus output cuts by three months.
U.S. benchmark crude futures gained 2.9%, bouncing back from an abrupt plunge to a five-month low earlier in the session. The OPEC Plus alliance, led by Russia and Saudi Arabia, was already considering postponing the supply increase planned for January as crude prices faltered amid renewed lockdown measures.
“The move higher was helped by reports that Russia was open to delaying the OPEC Plus cuts,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “More importantly though, today’s move also suggests there is strong investor appetite to own oil sub-$40 a barrel.”
Futures had earlier sold off amid the double whammy of rising Libyan supply and a dwindling demand outlook as England joined the string of European countries to renew lockdowns. That could be just the curtain-raiser for
a turbulent week of trading as Americans head to the polls today in an election that could reshape U.S. policy on everything from fiscal stimulus to Iran and fracking.
Expectations that OPEC Plus will postpone its planned easing of output cuts in January have increased recently as new threats to the fragile demand recovery are compounded by the group’s own rising production. The second wave of the virus around the world could push global oil demand to as low 88 to 89 million barrels a day, down 11% or 12% from last year, Trafigura Group boss Jeremy Weir said at a conference.
“There’s not a whole lot that goes right for oil from here,” said Peter McNally, global head for industrials, materials and energy at Third Bridge. “Demand is unlikely to surprise to the upside, with lockdowns being reimposed.”
Despite the recent price weakness, Vitol Group, the world’s biggest independent oil trader, characterized the latest lockdown measures as just a “speed bump,” with tightening global inventories likely to cushion the downside. The bigger picture is still a world in “stockdrawing mode,” Mike Muller, Vitol’s head of Asia, said in an interview Sunday with Dubaibased consultants Gulf Intelligence.
At the same time, China raised the quota for use of overseas oil by nonstate entities next year by more than 20%, presenting a bright spot for an otherwise precarious demand picture.
OPEC Plus agreed in April to remove 9.7 million barrels a day from the market, a deal that raised prices out of a historic slump caused by the coronavirus pandemic. As the global economy recovered, the group eased those curbs by 2 million barrels a day in August.
The market absorbed that extra crude and prices remained stable through the summer, but by mid-September a resurgent virus started to change the picture.
Saudi Energy Minister Prince Abdulaziz Bin Salman, the driving force behind the OPEC Plus output agreement, started warning that he won’t stand by and see the hard-won recovery in oil prices get wiped out by a second wave of covid-19. In October, Novak joined him in pledging a proactive response to an increasingly precarious oil market.
Moscow and Riyadh don’t only have to contend with the demand impact of the pandemic. There are signs that the disciplined implementation of the production cuts, which has been a key part of their success, is crumbling.
OPEC production increased significantly last month, according to a Bloomberg survey. Output rose by 470,000 barrels a day to 24.74 million a day.
Extra production from wartorn Libya, which is exempt from making cuts, was part of the problem. But Iraq and Nigeria, both of which have habitually flouted their output limits, also pumped more.