Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:
There was no lack of oil price swings last week, but the market is taking no risks before today’s OPEC+ meeting, waiting to see what the alliance plans for November before disturbing the price nirvana.
Prices are staying largely flat as OPEC+ has the full attention of the oil market. What will shape prices going forward is the key topic of the meeting, how much more crude it will release to the market from November.
Normally there wouldn’t be any doubt that OPEC+ will stick to its existing supply recovery plan, but as global supply is more constrained than what the group previously expected and as demand signals are increasingly bullish, a talk of potentially bringing back more barrels than planned is within reason.
The brewing energy crunch has fanned commodity prices across the board and made both oil and gas quite expensive for customers, so this could start troubling producers at some point, with last week’s $80 raising eyebrows.
Despite the favorable market conditions, we expect that OPEC+ will stick to its plan to marginally bring back 400,000 bpd on a monthly basis, and wait until December to make any larger market disruptions.
For now, most producing members may be comfortable with an $80 per barrel Brent price, but there is a risk of receiving backlash or pressure from buyers like the US and China, who are openly calling for lower energy prices.
Nevertheless, the trajectory of the energy crunch is still in its nebulous stages, not yet a fully-blown crisis, so OPEC+ will be prudent not to overstep and try to get ahead on a market signal that has not yet been sent.
Good to also remember that OPEC+ doesn’t have a mandate over the weather, so climate events could take the oil price to new volatile extremes, especially if the stress on supply chains persist.
But until then, a cautious OPEC+ supply approach without surprises should keep Brent largely stable, and more ‘action’ can be expected at the December meeting.
The tighter crude balance implies that there will be larger inventory draws in the short-term, which will continue to provide upward support to oil prices.
Rystad Energy estimates implied crude draws of 1.85 million bpd in the third quarter of 2021, but for this to calm to 450,000 bpd over the fourth quarter, assuming OPEC+ delivers on its 400,000 bpd per month tapering plan.
On another note, the September price rally was also supported by a slower than expected ramp up from some OPEC+ countries, maintenance in Kazakhstan, as well as a vicious hurricane season in the US Gulf of Mexico.
Rystad Energy estimates that in October 2021 OPEC+ spare capacity will be about 8.6 million bpd, and will approach the “pre-Covid” levels of 7.2 million bpd either in December or January, after peaking at 16.3 million bpd in the midst of the pandemic.