Oil prices ease following Opec+ output cuts and China demand concerns

The 23-member alliance of producers agreed to reduce output for the month of October

Brent was trading lower on Tuesday morning after the Opec+ meeting on Monday. Reuters
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The rally in oil prices eased on Tuesday after a modest output cut by Opec+ and its allies for the month of October and rising demand concerns owing to Covid-19 restrictions across China, the world’s biggest energy importer.

Brent, the benchmark for two thirds of the world’s oil, was trading 2.76 per cent lower at $93.10 a barrel at 9pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.25 per cent at $87.09 a barrel.

“The Opec+ cuts are modest and likely to be easily achievable, given that many countries in the producers’ alliance are already failing to hit their output levels,” said Emirates NBD economists Khatija Haque, Edward Bell and Daniel Richards.

“But the main takeaway should be that Opec+ is prepared to intervene to keep oil prices from falling too much. Should a negative flow of data or news weigh on oil prices again, markets should expect to see more intervention to protect the downside in oil.”

The Opec+ group of oil producers agreed on Monday to cut its October output by 100,000 barrels per day, reverting to August production levels to support prices, with the slowing global economy posing demand headwinds and a potential Iran nuclear deal bringing more crude to the market.

“This decision is an expression of will — that we will use all of the tools in our kit,” Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg in an interview on Monday.

“The simple tweak shows that we will be attentive, pre-emptive and proactive in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry.”

 Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman.  Reuters

The decision by Opec+ to reverse the 100,000 barrels per day increase in September was "more symbolic than fundamentally significant in that it doesn't really change the dynamics in the market, but it will make traders think twice about driving prices lower in the way they have recently”, said Craig Erlam, senior market analyst for the UK, Europe, the Middle East and Africa at Oanda.

Oil prices have been extremely volatile this year amid supply concerns linked to Russia's military offensive in Ukraine, pandemic-related movement restrictions, Iran nuclear deal talks and an expected slowdown in global economies due to higher inflation.

“The disturbing global economic outlook, combined with the prospects for a nuclear deal between the US and Iran, created a bearish case for oil prices, something that hasn't been the case for much of the year,” Mr Erlam said.

“If the market tries to drive the price much lower again, or the fundamentals change, the group will cut again and it won't wait until October 5 [when the next Opec meeting will be held].”

Another factor affecting demand is the situation in China. About 65 million people across dozens of cities in the country face movement restrictions as it battles its biggest Covid-19 outbreak since early 2020, when the pandemic began.

The world's most populous country is carrying out mass testing of its population to stem the spread of the pandemic and continues to enforce its “zero-Covid” strategy.

The escalating energy crisis in Europe is also affecting oil prices. Russia's state energy company Gazprom last week shut off gas supplies to the continent through the Nord Stream 1 pipeline after it detected a leak.

The pipeline, which runs under the Baltic Sea to supply Germany and other nations, had been due to resume operating on Saturday after a three-day halt for maintenance.

Gazprom did not provide further details on when it would resume operations.

If oil prices continue to edge lower towards the end of the third quarter or into the final months of the year, Opec+ would approve more meaningful production cuts, “say 500,000 bpd to 1 million bpd, to prevent any disorderly sell-off”, Mr Bell said.

“With Russian oil production likely to be further curtailed from December once EU sanctions on seaborne imports come into effect, and as inventories globally have been drained, both because of strong demand in the first quarter and as a result of strategic reserves being released, a more proactive Opec+ will help to set a floor under prices and increase the probability of upside shocks going forward.”

The EU intends to cut its dependence on Russian waterborne crude imports by December 5 and refined products by February 5.

“This will likely cause some disruptions as Russian oil imports to the EU amounted to 2.8 million barrels per day in July,” UBS strategist Giovanni Staunovo said.

“With Europe cutting its imports from Russia and SPR [strategic petroleum reserves] sales ending, we continue to expect the oil market to tighten over the coming months.”

Swiss bank UBS continues to maintain its bullish outlook for oil prices. Last week, it had predicted that Brent would rebound to $125 per barrel in the coming months.

The International Energy Agency in its monthly report last month also forecast higher oil demand growth this year as Europe switches to oil in power generation to move away from natural gas, which is becoming pricier.

The Paris-based agency expects global oil demand growth to jump by 380,000 bpd to 2.1 million bpd this year.

“The one relief for consumers remains China’s low levels of economic activity, thanks to the country’s zero-Covid policy. Should pandemic restrictions there ease, as appears to be expected by the end of the year, the risks for upside in oil will continue to accumulate,” Mr Bell said.

Updated: September 06, 2022, 5:03 PM
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