Oil is at its highest level since early March, with vaccine-driven optimism and signs that an orderly transition of power in the US is underway helping the demand outlook. Positive comments on the state of the Chinese economy by Premier Li are also supportive.
The high oil level saw WTI touching $45.20 and Brent $48.03. The front three expiries of the Brent curve settled in backwardation on Monday and Jan21 has continued to trade over Feb21 on Tuesday. Demand from Asia has been the catalyst for this increased demand.
But it’s hard not to get concerned about how quickly oil has priced in the recent good news, and hedge funds have flipped bear to bull on the move from sub-Brent $45 to +$48, including expectations that OPEC will extend current production cuts by 3-6 months. It remains the market's base case that an extension will be announced. Still, the oil will be susceptible in the near-term to any outcome seen as indicating that OPEC tensions mentioned in recent press reports are real and may threaten the implementation of cuts during what remains an uncertain period for oil.
OPEC holds its 180th Meeting of the Conference on November 30, followed by the 12th OPEC and non-OPEC Ministerial Meeting on December 1. The market expectation is that the current production quotas due to rise by 2Mbd on 1 Jan-21 will be retained, likely for another three months. Indeed, this should be sufficient to bridge a challenging northern hemisphere winter from a Covid-19 perspective to potential improvements in economic activity and mobility coming with the rollout of vaccines.
It seems logical that this will be the production club's final effort to protect oil markets from a collective perspective. Internal tensions and domestic pressures have been emerging both from expected sources, such as Iraq and Nigeria, and from previously core members such as UAE – this is unsurprising given the combination of low oil price and production volumes; Saudi and Russia have strongarmed discipline and consensus.
Still, something more delicately diplomatic may be needed to assuage members' concerns to present a unified message to the market, especially as the organization faces longer-term existential questions in the context of the transition from fossil fuels to green energy.
As we count down to OPEC's meeting on November 30th, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.
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