Crude futures are trading higher today as the market has quickly moved to discount the net negative effect on supply and demand balances for Sep-21 from Hurricane Ida and instead focused ahead on today’s monthly OPEC+ meeting.
It is fair to say that the market widely expects OPEC+ to ratify its plan of bringing back 400,000 bpd of crude supply also for October, which is what’s on the table today.
Ministers also received the forecast for supply-demand from OPEC+’ own technical committee yesterday, which predicts a deficit in the oil market of 825,000 bpd through year-end if OPEC+ follows its plan.
Markets seem to largely agree with OPEC+ on the expected supply shortage and the stock draws that will be caused are being priced in through the forward curve.
What is not so certain, we believe, is whether demand will be able to grow as quickly as OPEC+ and the market predicts, given the risk of new lockdowns to fight the unresolved Covid-mutant spread.
We may be witnessing a classical “buy the rumor, sell the fact” pattern in trading today, as prices are bid up in case OPEC+ were to deliver a “surprise move” and chooses to hold back its scheduled supply increase.
We wouldn’t be surprised if some of the gains evaporate in the likely case that the plan is simply ratified.
Traders know OPEC+ has surprised the markets before, and as lately as July, the market was left without an OPEC+ decision for two weeks, supporting prices for a while as UAE balked at agreeing to supply increases without receiving a higher share of them.
This time around, however, it would be a major surprise to the market if OPEC+ did anything “in a rush”.
A theoretical surprise decision to hold off from increasing supply in October would potentially support prices further, but a more likely ‘stick to the plan’ decision is likely to keep them from rising.
Hurricane Ida creates a net negative effect on overall crude balances, but within the crude market it is lending some short-lived support to prices for medium sour grades, such as GoM benchmarks (eg. Mars) and LatAm grades.
The reason these grades are gaining is that more US refinery capacity is shut, than the expected loss in medium sour GoM supply, tightening the relative prices to WTI-like crudes.
Moreover, gasoline and other key fuels see a net positive/bullish effect on balances, as end-use demand is much less affected than the supply of products from PADD III refiners.
Gasoline cracks for New York Harbor, however, remain subdued as the Colonial pipeline has resumed operations, reducing concerns for any material supply tightening on the back of the Hurricane.
As we have just entered Hurricane Season, we need to keep a close eye on the GoM, but today it’s entirely about OPEC+ and prices typically fluctuate on rumors and settle on decisions.
