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Commodities Corner: Oil-price volatility complicates Sunday’s OPEC+ decision on production levels

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Oil has been particularly volatile, with U.S. prices touching their lowest level of the year and then rallying by more than 10% in a matter of days, making a decision by major oil producers this weekend even more difficult.

The Organization of the Petroleum Exporting Countries and their allies, led by Russia — a group known as OPEC+ — are scheduled to hold an official meeting on Sunday. Reports have said that the gathering was changed from an in-person to virtual event.

The change to a virtual meeting “signals little likelihood that the group will change production,” said the Kansas City energy team at StoneX, in Thursday’s newsletter.

“Earlier in the week, multiple sources signaled that the group would do another production cut with markets falling and demand risk at stake. However, it seems that the sentiment has changed,” they said.

At their lowest points on Monday, U.S. benchmark West Texas Intermediate crude touched $73.60 a barrel on the New York Mercantile Exchange, the lowest front-month intraday low since Dec. 27, 2021, according to Dow Jones Market Data. Global benchmark Brent crude also traded as low as $80.61 on ICE Futures Europe, the lowest since Jan. 10.

Read: U.S. oil taps its lowest price of the year thanks to China as OPEC+ output decision looms

Prices for both benchmarks, however, have rallied since then, with WTI crude up by around 11% from its Monday low, at $81.80 in Thursday dealings. Brent’s up nearly 9% at $87.78 from its Monday low.

The oil market has been watching news tied to China’s zero-COVID policy — easing on signs of tighter restrictions and rising on signs of any curbs to those restrictions — given the country’s heavy influence on global energy demand.

In a year-ahead commodity outlook note released Thursday, Francisco Blanch, head of global commodities and derivatives research at BofA Securities, wrote that if the global economy does go into recession, led by a pullback in activity in the U.S. and Europe, commodity prices could drop.

But he points out that China is “50% of the world’s metals demand and still has yet to fully reopen post pandemic,” which is likely to lend support to commodity prices.

BofA Securities expects the Chinese economic activity to “pick up firmly as zero-COVID policies are gradually eased,” said Blanch, so a reopening of its economy would likely lend support to commodity prices, with a potentially “substantial 5% pick up in domestic demand for oil, assuming mobility gradually recovers.”  

Options

At the last OPEC+ meeting back in October, the group agreed to reduce its collective crude production levels by 2 million barrels a day starting in November, given the uncertain outlook for the global economy.

Given the drop in prices since OPEC+ last met, the group on Sunday is “likely to either announce an additional cut or give pointed rhetoric that they will look to cut in the months ahead if prices remain lower than their target of $90 [a barrel],” said Matt Smith, lead oil analyst, Americas, at Kpler.

But by foregoing an in-person meeting, OPEC+ has opted for “no-drama optics,” seemingly increasing the likelihood of a rollover decision” on production levels, said analysts at RBC Capital Markets, led by Helima Croft, head of global commodity strategy and MENA research, in a Wednesday note.

Members of OPEC, in line with the agreement with their allies, cut supplies by just over 1 million barrels a day last month, according to a Bloomberg survey released Thursday, with production averaging 28.79 million barrels a day. The OPEC reduction in crude output was the most since 2020, according to Bloomberg.

Most people expect OPEC to roll over their previous production cut, said Phil Flynn, senior market analyst at The Price Futures Group, in a Thursday report, but there are still some that believe OPEC may “want to give us a surprise cut over the weekend.”

“Make no mistake about: it if OPEC says they are going to cut production, then you…better believe it,” he said, because OPEC has “already been compliant with their previous production-cut promises.”

The OPEC+ meeting, however, will come just a day ahead of the European Union’s embargo on Russian seaborne oil. A price cap on Russian oil is also set to kick in on Dec. 5, but the EU and Group of Seven nations reportedly have not yet agreed on price for the cap.

Oil supply disruptions have not likely peaked given the upcoming ban on seaborne transported Russian oil, said Matthew Sherwood, senior Europe and lead commodities analyst at the Economist Intelligence Unit. The ban on Russian oil products is set for Feb. 5.

That, coupled with the limitations on insurers, will be when disruptions hit their peak, Sherwood recently told MarketWatch. The EU sanctions also include a ban on insuring ships that carry Russian oil.

Read: Why the EU ban and G7 price cap on Russian oil won’t guarantee a lasting rally for oil

Still, OPEC+ will be “quite worried about the sharp drop in oil prices” in recent days, said Sherwood. The producer group will also wonder if it needs to make additional production cuts, he said.

Sherwood expects OPEC+ to take a “wait and see” attitude to production quotas. “It already announced a major cut in production, which began in November. “Further cuts might be in the offing, but it is unlikely that there will be enough of a consensus to do that” at Sunday’s meeting, he said.

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