Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:
The confirmation that OPEC+ would keep a cap on supply, instead of feeding the market with even more product and bringing it towards a closer equilibrium, drove traders into a buying frenzy for front-month Brent contracts, as the decision guarantees a tight supply picture in November and December.
Is the growing oil price becoming an unpredictable bubble? Traders are certainly considering when, and at what threshold, a price ceiling will begin to formulate.
The tight market was not met by any extra supply relief from OPEC+, which adds fuel to the supply-constrained oil price rally, but the spectacular third quarter rally can only be repeated in coming months should unusual circumstances – either climate events or unplanned supply outages – strike again.
Otherwise, the steady increase of OPEC+ volumes will gradually bring oil prices out of their deep backwardation.
OPEC+ producers will definitely be monitoring how the high prices affect sales, and also how the market balances evolve through the end of the year, so we expect more “action” from OPEC+ at the December meeting, once there are more clear signals on the winter weather risks and associated upside risk to oil demand.
For now, OPEC+ has not come to the supply rescue, but at the same time, it hasn’t pulled the supply floor out from under the market. However, the market reaction is one of the strongest to essentially an already-known market outcome – that OPEC+ would stick to its chartered incremental tapering plan.
The market took the good news it was waiting for and ran with it. At the same time it is a market ripe with risk and many unknowns, and it has already demonstrated its capacity for speculation even at the slightest macro queues.
How fast Covid recovery plays out, how cold winter is, and how financial and money markets develop in the coming months can all tip the oil price scale.
The policy part may hold extra weight on the macro backdrop as 2021 comes to a close. Guidance on the opening of Nord Stream II could alleviate the winter energy crunch, Libyan presidential elections in December could trigger supply or egress disruptions in oil, and US Fed policy can make oil more or less expensive, in dollar terms, to name a few.
Traders are seeing no emergency action from the supply side to quell rising oil prices, and are adding value on the expectation that strong oil demand will materialize in the coming quarter.
As oil gets pricier by the day, buyers need to reassess how they react to such a sustained and upward cycle that hasn’t been witnessed since the so-called commodity “super-cycle” days of 2008 and 2011.