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Commodities Corner: OPEC+ needs to ‘thread the needle’ between higher oil prices and losing market share

Major oil producers this week will face a decision on whether to raise crude output levels, against a precarious backdrop of supply and demand that has led prices to their highest levels in years.

The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, will hold their monthly ministerial meeting on Thursday via videoconference, and are expected to make a decision on production levels as the market heads into the holiday season.

OPEC+ will “continue to try to thread the needle between encouraging higher oil prices so they can monetize their resource positions and replenish depleted government budgets,” but without creating too much upward momentum that ignites new development and production from U.S. shale or international oil companies, said Regina Mayor global head of energy at KPMG.

At a meeting in early October, OPEC+ kept the agreement reached in July to gradually raise monthly oil production by 400,000 barrels a day from August. The October decision included a 400,000 barrels-per-day increase in November.

Maintaining the current production plan is the most likely outcome for Thursday’s meeting, said Mayor. However, OPEC+ may consider increasing the amount “marginally, or more substantially,” by 600,000 barrels to 1 million barrels per day, she said. 

Keeping the daily 400,000-barrel increase would have “limited downside,” and OPEC+ is “likely more comfortable with prices in the $80s versus risking prices dropping back into the $70s,” Mayor said.

Since the last meeting, oil prices have touched fresh multiyear highs, with front-month futures prices for U.S. benchmark West Texas Intermediate crude
CLZ21,
+1.03%

CL.1,
+1.03%

settling at $84.65 on Oct. 26, the highest finish since Oct. 13, 2014, according to Dow Jones MarketData. Global benchmark Brent crude
BRNZ21

BRNF22,
+1.28%

BRN00,
+1.28%

settled at $85.99 on Oct. 25, the highest finish since Oct. 3, 2018.

Read: Oil ticks higher ahead of this week’s OPEC+ meeting

Also see: This city just recorded the U.S.’s highest-ever average gasoline price

““Producers are enjoying the price environment and wouldn’t want to ruin the party by untimely production growth.””

— Manish Raj, Velandera Energy Partners

Right now, “producers are enjoying the price environment and wouldn’t want to ruin the party by untimely production growth,” said Manish Raj, chief financial officer at Velandera Energy Partners. “Producing countries are happily replenishing their balance sheets are seeing years of decline and they are in no rush to let the good times end.”

Still, among the biggest concerns for OPEC+ continues to be the possibility that the U.S. or other producers outside of the group will take advantage of the multiyear high in oil prices.

U.S. producers are not bound by OPEC+ restrictions but so far U.S. producers have been “restrained in production growth plans,” said Rohan Reddy, analyst at Global X. For the week ended Oct. 22, the Energy Information Administration reported domestic petroleum production at 11.3 million barrels per day. That’s well below the 13 million barrels per day seen in March 2020, before the pandemic took its toll on the global economy.

Oil prices may continue to move higher, with U.S. storage levels at Cushing, the delivery hub for the NYMEX WTI Crude futures contract, falling at “some of the fastest paces we’ve seen all year in recent weeks,” said Reddy. That may lead U.S. producers to “take a more aggressive stance on production.”

Read: Why oil traders say this key crude delivery point looks ‘basically empty’

Reddy also pointed out that there’s a growing expectation that Iran will soon renew talks to revive the 2015 nuclear deal with worth powers. Iran has indicated it plans to resume talks on the Joint Comprehensive Plan of Action, known as the Iran nuclear deal. The U.S. withdrew from the JCPOA in 2018 under the Trump administration, and talks to revive the deal were suspended in June.

If oil sanctions on Iran were lifted as a result, “this could mean an additional one million or more barrels a day of oil released into the market,” said Reddy.

OPEC+ may also face conflicts similar to that between Saudi Arabia and the United Arab Emirates at the July meeting, he said. If OPEC+ members decide to raise production, the UAE may demand that their baseline be raised as they “need to pump the oil out of the ground faster, before demand dries up.”

At the same time, some countries may want to “jump at the opportunities presented by the global energy crisis,” particularly in Europe, which is “overly reliant” on Russian natural gas, Reddy said.

High natural gas and coal prices encouraged users to switch to fuel oil and diesel for power generation — contributing at least one million barrels per day in oil demand, said Reddy. On Oct. 5, front-month natural-gas futures
NGZ21,
-2.40%

NG00,
-2.06%

settled at $6.312 per million British thermal units, the highest since December 2008.

Read: Why consumers will be paying a lot more for natural gas this winter

Reddy believes oil prices could surge toward $90 to $100 a barrel if OPEC+ sticks with its current output and as “the current trajectory of economic growth continues,” driving a surge in demand and a wider supply deficit.

Similarly, KPMG’s Mayor sees oil heading for prices in the $90s, given that the industry has “systematically under-invested” in long-term oil cycle projects for a prolonged period of time. “We will continue to feel tightness between supply and demand for the next [nine to 12] months before enough additional supply comes into the market to provide a stronger cushion,” she said.

But a big decline in oil prices may be in store if the market sees “slowing economic conditions caused by the shift in central bank policies, a new pandemic variant causing lockdowns globally and a significant increase in output by OPEC+,” or rising U.S. production, says Reddy.

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