Oil prices rally on news of biggest potential Opec+ output cut in two years

The 23-member alliance meets in Vienna on October 5 to determine production levels

Opec's headquarters in Vienna, Austria. Global recession fears, a strong US dollar, surging inflation and monetary tightening around the world have weighed on oil markets. EPA

Oil prices rallied on Monday after media reports that the 23-member Opec+ alliance is considering slashing output by more than 1 million barrels per day, which would be its largest output cut since the start of the Covid-19 pandemic.

Brent, the benchmark for two thirds of the world’s oil, was trading 4.23 per cent higher at $88.74 a barrel at 10.05pm UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, was up 5.04 per cent at $83.50 a barrel.

Both benchmarks posted their first quarterly loss in two years at the end of a volatile trading week on Friday. Brent fell by about 22 per cent in the three months to the end of September, while WTI shed about 25 per cent.

Global recession fears, a strong US dollar, surging inflation and monetary tightening by central banks around the world have continued to weigh on the market.

The International Monetary Fund, the World Bank, the Institute of International Finance and the Organisation for Economic Co-operation and Development (OECD) have all slashed their global economic growth forecasts for this year.

Opec+ plans to meet in Vienna on October 5, their first in person meeting since March 2020. An output cut of the suggested size would provide a stronger floor to prices, boosting them towards $90 a barrel or more.

“The fact that this is not a virtual meeting any more and partners want to meet in person is an indication for traders and investors that … the meeting is not about the potential half-a-million production cut,” said Naeem Aslam, chief market analyst at AvaTrade.

“Reducing oil supply by that much may not do the job,” he said, adding that the alliance “will have to devise a strategy that can support their desired level of price, which is defiantly above the $80 market”.

Opec+ agreed in the spring of 2020 to cumulatively cut crude production by a record 9.7 million barrels per day as it faced a pandemic-induced crash in oil prices. The alliance then gradually whittled down the cuts over the past two years.

“In order to prevent a further disorderly unwinding in oil markets, Opec+ is likely to cut output for November levels onward by a larger degree than what they planned for October, with as much as 500,000 barrels per day to 1 million bpd potentially being cut,” Emirates NBD economists Khatija Haque and Edward Bell said in a research note on Monday.

In its outlook report last month, Opec kept its global oil demand forecast unchanged for this year despite headwinds from rising inflation and interest rates, as well as the continuing war in Ukraine. It expects global oil consumption in 2022 to average 100 million bpd.

Last month, the International Energy Agency slashed its estimates for 2022 global oil demand growth to 2 million barrels per day, marginally down from its 2.1 million bpd projection in August.

“We may start to see guidance from Opec+ take its cues from global central banks and adopt a more 'hawkish' tone on oil production,” Mr Bell said.

“Our oil price assumptions for the end of 2022 and into 2023 assumed that Opec+ would adopt a more interventionist stance in the market.”

Emirates NBD expects oil prices to average $105 a barrel for Brent and $95 a barrel for WTI in 2023.

“The challenge in cutting output will be to avoid pushing prices up too much that it exacerbates the pending slowdown in demand growth by making fuel unaffordable for many economies already dealing with high inflation and tighter monetary policy,” Mr Bell said.

“Thus, while we may get a cut now, it doesn’t necessarily mean Opec+ will keep moving in a downward direction on production going forward.”