by Louise Dickson, Senior Oil Markets Analyst at Rystad Energy
Oil prices are poised to close the week in a bearish track as traders were surprised by a build of crude stocks in the US and are pricing in reports that OPEC+ may consider an option to hike output more than planned in its coming meeting.
Building inventories triggered an alarm for markets, especially at a time when Brent exceeded $80 per barrel, and traders question how justified this new threshold is. If OPEC+ sticks to the plan, then we shouldn’t see much downside, but reports indicate that talks are open to other scenarios too.
What OPEC+ will decide next week has particular gravity, as the alliance holds 9.2 million bpd of the world’s remaining spare oil production capacity of 10 million bpd, making it effectively the strongest decision maker of the global oil market .
The supply picture is without a doubt materially tighter than it was at the last OPEC+ meeting, but it would be uncharacteristic for OPEC+ to implement a knee-jerk policy in reaction to the energy crisis just yet.
The most likely scenario is that the organization sticks to its plan to incrementally increase production by 400,000 bpd, prudently waiting to see just how deep the natural gas and electricity crisis contagion spills into the market.
Nevertheless, a surprise from OPEC+ is not unheard of and there is historical precedent of the group opting for an abrupt change in policy when the markets signaled the need. Such policy changes, however, are used sparsely and are the exception - hardly the rule.
The energy crisis, should a colder than usual winter materialize, will certainly boost oil demand faster than previously expected by OPEC+ and other market players, but the bump will likely be limited to 1 million bpd.
Most of the switching capacity to oil will only occur in Asia, and will likely be limited to the power sector, with potential to also be used in heating should colder temperatures make this switch necessary.
OPEC+ of course cannot dictate the weather, so climate events could take the oil price to new volatile extremes, especially if the stresses on supply chains – congested ports, slowed rail deliveries, and truck driver labor shortages – exacerbate the already fragile situation.
Bottomline, OPEC+ does have the single most influential thumb on oil supply, and so weather events aside, the Vienna group remains the market maker on the supply-side.
Of the total crude oil that is off the market currently, we estimate a significant chunk consists of medium sour grades hailing from the Middle East as major producers like Saudi Arabia, Kuwait, Iran, Iraq, and UAE produce a significant amount of medium sour crude grades.
Come Monday, OPEC+ finds itself in a relatively comfortable perch, as it is not only the decider of how much volumes to taper, but also boasting the advantage that its barrels currently off the market, mostly medium crude barrels, are in especially high demand for refiners.