The price of WTI crude oil broke above recent highs to hit its best level since 2014 on Monday, climbing above $78 per barrel.
Oil’s latest gains come on the back of the decision by the OPEC+ to maintain a gradual supply hike of 400K barrels per day. Some forecasters continue to watch the oil market closely, as it can have serious repercussions for global inflation.
OPEC+ gave oil bulls a red rag to bid up futures contracts as it stuck to the planned increase in production for November. Some had thought it could raise output a little more than the summer plan had set out, or frontload the increase in output in December by bringing into Nov (ie, 800k bpd in Nov), but the cartel stuck to the script.
WTI and Brent crude both surged on the news and made a 7-year high. “It’s not that demand is suddenly forecast to improve, it’s more that OPEC+ is keeping such a tight grip on supply and the US rig count just isn’t there to mop up excess demand,” noted Neil Wilson, Chief Market Analyst at Markets.com. “So, the market is going to be tight for a while yet – at least until well into 2022.”
“Judging by the fact that prices broke out on the back of that decision, it looks like some investors had probably figured the cartel would cut production even more given that the natural gas crises is expected to boost demand for crude oil even more,” said Victor Argonov, senior analyst with EXANTE. “Some had speculated that the group would hike output by 800K bpd, with a pause in December. Even though both options would have offered no increase beyond what was previously agreed, the 800K front-load would have probably helped to ease pressure a little. Disappointed that this wasn’t the case, the oil bears probably threw in the towel, helping to fuel the rally even more.”
Going forward, Argonov reckons the supply of oil will be gradually restored by the OPEC+ while in the US, production continues to recover from the impact of the deadly and destructive Hurricane Ida. This should help to reduce the risks of a supply shock. In terms of demand, well, therein lies the bigger uncertainty.
Currency crises could impact oil demand
“The rising oil price is in and of itself something that could negatively impact crude oil demand, not least from countries where there is already a currency crisis.,” Argonov said. “Think Turkey, and potentially India. On top of this, China – the world’s largest oil consumer – is already showing signs of weakness.”
Governments in some western economies, meanwhile, are starting to raise taxes to pay for the huge stimulus programmes introduced during this pandemic. Rising taxes would mean lower disposable incomes, which, in turn, may lead to weaker demand for not only crude oil, but other commodities too.
“The dial on inflation has been nudged up yet another notch with oil prices jumping back up to 3 year highs,” commented Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “Brent crude surged by more than 3% edging towards $82 a barrel after OPEC+ decided not to turn on the taps more fully. Production will be upped as planned by 400,000 barrels a day in November, but members turned their backs on calls from big consumers like the USA to increase supply.”