After several weeks of declines, oil began October trade with a gain driven by plans by OPEC+ to reduce production by a substantial amount.
At the end of last month, the media reported that Russia had proposed a production cut of 1 million bpd. Later reports said discussions are underway for an even bigger production cut.
"Anything less than 500,000 barrels a day would be shrugged off by the market. Therefore, we see a significant chance of a cut as large as 1 million barrels a day," ANZ analysts said, as quoted by Reuters, today.
Indeed, the reports follow a decision by OPEC+ last month to reduce production by 100,000 bpd in October—a move that failed to have any effect on markets, not least because of the cartel’s continued underperformance with respect to its own production targets.
A cut of 1 million barrels daily or more, however, is likely to have an impact on prices, even though OPEC+ has been undershooting its target by over 2 million bpd since at least June.
Oil prices, which had risen sharply since last year as oil demand rebounded faster than expected after the pandemic lockdowns, lost about a quarter of their value over the third quarter.
The main reason was an increasingly gloomy outlook for the world economy as inflation continued pressuring economies and central banks turned aggressive to rein it in, risking a recession.
The world’s inflation problem could become even worse if OPEC+ cuts production substantially, the Wall Street Journal reported this weekend. The cuts would push prices higher, adding to the inflationary burden and effectively increasing the risk of a recession.
At the same time, a production cut would mean more spare capacity and this would mean downward pressure on longer-term prices, according to consultancy FGE.
"If OPEC+ does decide to cut output in the near term, the resultant increase in OPEC+ spare capacity will likely put more downward pressure on long-dated prices," the company said in a note last week, as quoted by Reuters.
By Irina Slav for Oilprice.com
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What is causing oil prices to rally is China easing its restrictive lockdown and opening to business as evidenced by issuing its biggest fuel export quotas and allocating 15 million tons (110 million barrels of oil) for them in addition to crude oil imports which China issued to its independent refiners, the so-called teapots.
However, the real bullish factors behind any oil price rally are the tightness of the global oil market, the robustness of oil demand and the fast-shrinking spare oil production capacity including OPEC+’s.
As a result, oil prices could resume their surge with Brent crude projected to hit $100-$110 a barrel before the end of the year . However, Brent crude could even go higher to $115-$120 if G7 countries go ahead with capping the price of Russian crude exports.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert