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Oil Prices Gain 2% on Tightening Supply

Oil Price Gains Limited By Lack Of Clarity About OPEC+ Cut

After OPEC+ yesterday agreed to cut production by 2 million bpd, oil prices rose but in a much more limited way than many would've predicted as it remained to be seen how much of the cut would be physical and what the U.S. would do in response to the move.

"The market wasn't thrilled since the actual cuts would be half what the headline number suggests," Velandera Energy Partners CFO Manish Raj told Market Watch.

Goldman Sachs went further, estimating the actual production cuts at half a million barrels daily because of the gap between targets and output.

Indeed, OPEC+ has been undershooting its own production targets for months, with the August figure at over 3 million barrels daily. This led some analysts to suggest that the production cut agreed at this meeting would be more of an attempt to move targets closer to actual production than anything else.

Until it becomes clear whether OPEC+ will be cutting actual production or moving targets, the price rally forecast ahead of the meeting in Vienna on Wednesday will probably wait.

Regarding the reaction of the United States, there has been a signal from President Biden that the likely response would be to release yet more crude from the strategic petroleum reserve. The Biden administration needs low fuel prices and it needs them now and over the next month until the midterm elections.

Despite the lack of details about the implementation of the production cut, Goldman raised its oil price target to $110 per barrel of Brent for the final quarter of the year. JP Morgan also suggested Brent could rebound to $100 in the current quarter, following OPEC+'s move to cut.

Meanwhile, headwinds remain, the strongest among them being the fear of a global economic slowdown, with recessions expected for some of the world's biggest economies such as Germany. These headwinds are likely to put a cap on any price rises unless supply shrinks significantly.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More