Oil prices bounced back on Tuesday as members of the Organization of the Petroleum Exporting Countries (OPEC) and their allies disputed media reports that they were considering reversing their October decision to cut production.
International benchmark Brent was below $90 a barrel on lingering concerns about the poor state of the global economy and weak oil demand heading into 2023.
Saudi Arabia, the United Arab Emirates and Iraq have all denied the reports The Wall Street Journal that the oil cartel was considering increasing production by 500,000 barrels per day at its next meeting on December 4.
OPEC’s increase would signal an easing of the 2 million bpd cut the Saudi-led group announced in October. The move infuriated the Biden White House at the time. And any easing could be seen as a positive shift in relations between the Saudi-led producer group and the Biden administration.
But Saudi Energy Minister Prince Abdulaziz bin Salman denied the report and said the cartel’s two-million output cut would remain in place until next year. Rather than an olive branch to the White House, the report was more of an OPEC trial balloon to test how the market would react to higher oil production in December. If so, OPEC has found a soft market with little stomach for more oil.
With a looming recession, a worsening economic outlook and a softening forecast for global oil demand, the appetite for oil just isn’t there to justify easing OPEC cuts.
The demand is not there. More oil would mean lower prices, and OPEC members want the profits that come from higher prices.
In fact, the cartel’s decision to cut output in October now looks justified and even prescient, as major forecasters such as the International Energy Agency (IEA) have lowered their demand forecasts in recent weeks.
The IEA last week cut its forecast for growth in global oil demand next year to 1.6 million barrels a day, citing growing economic concerns and the European energy crisis. That’s less than 1.7 million barrels per day.
The dilemma for OPEC and its allies, including Russia, is that there are legitimate near-term supply concerns that need to be factored in as they try to manage the market price in a context of weakening demand.
The EU is set to announce its price cap on Russian oil exports tomorrow, which will further reduce the amount of oil available on the market. The restrictions prevent shipping companies and insurance companies from transporting Russian crude unless it is sold below an agreed price ceiling.
Russia is a central member of the OPEC-plus alliance, which complicates decision-making within the coalition. Moscow will be hesitant to give up market share to other cartel members.
Against a backdrop of uncertainty, oil prices are likely to be volatile over the next few weeks, with an EU embargo and potential price cap set to begin the day after OPEC’s December meeting. If an agreement is reached on the cap, OPEC may postpone its meeting to avoid further clouding the market.
There is also China and a strengthening US dollar to consider.
The pandemic is not over, as evidenced by the rising number of cases in China and the country’s three recent Covid-related deaths. In Beijing, health officials say the situation is the “most complex and serious” since the start of the pandemic. Beijing’s “Zero Covid Policy” is not going away anytime soon.
Traders are fleeing to safe-haven assets like the US dollar to minimize their exposure to financial markets. A stronger dollar tends to weigh on demand because dollar-denominated oil is more expensive for importers.
Adding to the challenges posed by the strengthening dollar is a general sense that interest rates have yet to peak as the Federal Reserve seeks to curb inflation.
Oil will struggle to find a price floor in this environment. That won’t change until demand returns.
Until we get some positive news from either China or the US economy, the dollar will continue to rise while oil prices fall. OPEC, which denies increasing supply, may have set a floor of $85 a barrel under the Bent international benchmark, especially given the continued supply risks posed by Russia.