Most markets participants were expecting OPEC+ to stick to the plan but – amid high prices and a tight supply environment – it appears traders have been cautious, pricing in an element of surprise before the meeting.
The decision by OPEC+ to add the expected 400,000 bpd in November triggered a market reaction, as traders are now more boldly coming out from their cautious positions and pricing in a confirmed, tighter supply market.
The outcome of the OPEC+ meeting was no surprise, but when prices are at above $80 per barrel Brent, this is a level that makes customers uncomfortable and producers happy but cautious.
Caution was what kept prices unchanged in the early trading session, but after the initial reports of OPEC+ agreeing to maintain its modest supply boost – the market enthusiastically priced in the coming supply tightness.
It’s not that OPEC+ does not recognize the coming supply shortage. The group is well aware of the global inventory draws, maintenance work and rising demand, but chose to wait until later this year to adopt a bolder supply approach.
OPEC+ holds both the knife and the cake in the oil market, especially as the group boasts the lion’s share of the remaining unused supply capacity in the world.
The supply capacity control makes OPEC+ the only market player than can significantly redirect market conditions, apart from any unplanned outages or weather phenomena, justifying the extended bullish reaction after the meeting’s outcome became clear.
With prices now sitting comfortably at high levels without the threat of extra OPEC+ supply – other than the planned one – we are entering a period when demand needs closer monitoring.
The recovery of the economy, the potential of a cold winter and fuel switching from gas to oil in Asia suggest a rather quick demand increase to as much as 100 million bpd in December, but if prices keep on rising, the elasticity of oil demand may kick in as consumers, out of cost reasons, cut consumption.
Producing nations, and namely OPEC+, have to be careful not to allow prices to inflate too much, otherwise we may see an adverse reaction that could negatively impact post-pandemic economic growth.
Nevertheless, OPEC+ will surely keep on monitoring market developments and can amend policy going forward if needed, as it has done in the past when market conditions demanded.
Finally, looking at balances, the oil market will remain in a deficit for November and December.
The size of the deficit will of course depend on several factors partly on the demand side, most notably the strength of the Covid recovery in Asia, but will also hinge on additional oil to power generation demand from spiking gas prices and the gravity of the Northern Hemisphere’s winter.
Negative surprises and outages on the supply side outside of OPEC+ could also push the oil balance tighter, which justifies why the market remains bullish and on edge for the time being.
