Oil hits multi-year highs, a prolonged rally as OPEC+ sticks to output plan

Oil prices jumped on Tuesday, with U.S. crude hitting its highest since 2014 and Brent futures climbing to a three-year high, after the OPEC+ group of producers stuck to its planned output increase rather than raising it further.

U.S. West Texas Intermediate (WTI) oil fell 0.24% at $78.67 a barrel. Brent crude settled up $1.30, or 1.6%, at $82.56. Earlier, Brent fell 0.17% to $82.33 by 11:50(GMT+8) on Wednesday.

On Monday, OPEC+ agreed to adhere to its July pact to boost output by 400,000 barrels per day (bpd) each month until at least April 2022, phasing out 5.8 million bpd of existing production cuts.

"The market is realizing we are going to be undersupplied for the next couple of months and OPEC seems to be happy with that situation," said Phil Flynn, an analyst at Price Futures Group in Chicago.

Oil prices have already surged more than 50% this year, adding to inflationary pressures that crude-consuming nations such as the United States and India are concerned will derail recovery from the COVID-19 pandemic.

Late last month, the OPEC+ Joint Technical Committee (JTC) said it expected a 1.1 million bpd supply deficit this year, which could turn into a 1.4 million bpd surplus next year.

Despite pressure to ramp up output, OPEC+ was concerned that a fourth global wave of COVID-19 infections could hit the demand recovery, a source told Reuters a little before Monday's talks.

Oil analysts predict a prolonged rally as OPEC resists calls to ramp up supply

Now energy analysts believe crude prices could be poised to rally toward $100 a barrel.

OPEC and non-OPEC partners, a group collectively referred to as OPEC+, said Monday that it would stick to its existing pact for a gradual increase in oil supply.

OPEC+ said it had “reconfirmed the production adjustment plan” in a statement published online shortly after relatively swift ministerial talks. This referred to its previously agreed decision to add 400,000 barrels per day to the market for the month of November.

The group’s decision on production policy had been widely expected, although some had hoped pressure from the U.S. and India to tame soaring oil prices might have been enough to persuade the group to offer more supply.

“The market is full of confidence,” Tamas Varga, senior analyst at PVM Oil Associates, said in a research note on Tuesday. “The question is whether this optimism is justified or not.”

The recovery in global oil demand from the coronavirus pandemic has been quicker than many expected, while global supply has been disrupted by hurricane outages and low investment.

While Brent trading above $80 “might feel toppy,” Varga said prices are “only seen uncomfortably high until the first cold spell arrives in the Northern Hemisphere, creating additional demand and triggering a fresh bout of buying.”

In the short term, Varga said the current backdrop suggests “there is still room on the upside.”

$100 oil?

U.S. President Joe Biden’s administration has previously called on OPEC and its allies to boost oil output to tackle soaring gasoline prices. The move came amid concerns that rising inflation could derail the economic recovery from the coronavirus pandemic.

India, another big oil consumer, has also pushed for OPEC to consider more supply to ensure prices suit both producers and consumers.

Kieran Clancy, commodities economist at Capital Economics, acknowledged pressure had been growing on OPEC+ to return supply to the market more rapidly. “We think that their refusal to do so means that the market will remain in a deficit in Q4, which suggests that oil prices will remain elevated for at least the remainder of this year.”

Perhaps the more important question, Clancy said, “is whether OPEC+ will even be able to meet these less ambitious targets.”

“OPEC managed less than half of its planned increase in production in August [the latest available data], largely due to disruptions to operations in Angola and Nigeria. And if output continues to fall short of the group’s targets, oil prices could remain high into next year as well.”

Last month, analysts at Bank of America Global Research said that the bank could bring forward its $100 per barrel oil price target if temperatures are colder than expected during the winter, according to Reuters. This prospect, the analysts reportedly said, could drive a surge in demand and widen a supply deficit.

Separately, analysts at Goldman Sachs recently upgraded their year-end Brent price forecast to $90 a barrel, up from $80, citing a faster than anticipated recovery in global demand.

“OPEC members seem to not view rising prices as a critical problem for now,” energy analysts at risk consultancy Eurasia Group said in a research note. “However, top exporter Saudi Arabia has started cutting its official selling price to its core customers, likely to ease concerns about Brent crude oil futures climbing to or above USD 80 per barrel.”

On the demand side, energy analysts at Eurasia Group said China’s industrial slowdown, the collapse of real estate giant Evergrande, rising inflation pressure and Covid-19 disruptions worldwide could all undermine oil demand growth over the next 12 months.

In the near term, a repeat of a cold winter across the Northern Hemisphere “could cause major energy supply shortages in many leading industrial hubs,” they added.

Eurasia Group sees Brent crude prices at $75 a barrel through to year-end, with the oil contract expected to fall to $67 next year.