Oil rebounds as market expects Opec+ cuts to counter dip in demand

Alliance will meet on September 5 to decide its future output policy

Oil demand prospects were dampened by China's continued Covid-19 lockdown in Chengdu. Reuters

Oil rebounded on Friday amid market expectations that Opec+ could enforce production cuts to offset a potential decline in demand due to renewed a Covid-19 lockdown in the Chinese city of Chengdu.

Brent, the global benchmark for two thirds of the world’s oil, closed 0.71 per cent higher at $93.02 a barrel. West Texas Intermediate, the gauge that tracks US crude, settled up 0.3 per cent at $86.87 a barrel.

“China is the key question mark for the crude demand outlook and it seems that reopening momentum will remain elusive,” said Edward Moya, senior market analyst for the Americas region at Oanda.

“The lockdown of Chengdu, a vital transportation hub, will trigger another massive shock for the Chinese economy.”

The world’s most populous country is putting Chengdu, the capital of the Sichuan province and home to 21 million people, under lockdown as it undertakes mass testing and tries to contain a Covid-19 outbreak.

The restrictions in Chengdu come after Shanghai was shut for two months earlier this year.

“The mood is risk-off on Wall Street and that is driving the dollar to fresh records, which is also putting added pressure on all commodities. Oil is looking very vulnerable here as the risk of further Chinese lockdowns grows and as king dollar might be ready for another major run,” Mr Moya said.

Last month, Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview with Bloomberg that Opec and its allies would cut production if required to counter oil price volatility.

The group will meet on September 5 to decide on its future output policy.

“If September becomes a bloodbath on Wall Street, WTI crude could slide towards the $80 region, but the supply outlook should prevent a significant sell-off beyond there,” said Mr Moya.

“Opec+ is going to have an easy time justifying a modest production cut, given all the percolating global market worries.”

The war in Ukraine now in its seventh month and possible crude disruptions in Opec member countries Libya and Iraq could lead to further supply issues.

Despite an outbreak of violence in Iraq this week — following Shiite cleric Moqtada Al Sadr's announcement that he was abandoning politics due to his party's inability to form a government — oil installations in Opec’s second-biggest producer have been unaffected. Iraq exports about 3.3 million barrels per day.

Production was also not disrupted in Libya despite violent clashes between supporters of two rival governments in the capital, Tripoli.

Markets are also awaiting the outcome of talks related to the Iran nuclear deal. It is still not clear if the 2015 nuclear deal will be revived. The US said on Friday that Iran's latest response to the negotiations was “not constructive.”

Should there be a breakthrough, the agreement could pave the way for Tehran to add 4 million barrels of crude per day to the market. While this would not be immediate and could take some time for the oil to reach buyers, it will ease supply concerns.

Meanwhile, recession fears as a result of persistent high inflation and the Ukraine conflict continue to weigh on markets.

“The next major catalyst for oil prices will be the Opec+ meeting next week, where we would expect the producers’ alliance to keep output targets for October onward unchanged to try [to] put a floor under prices,” said Emirates NBD economists Khatija Haque, Edward Bell and Daniel Richards.