Oil prices were little changed on Monday, as the market awaited the official announcement of the OPEC+ decision to extend their production cuts into October. The group of major oil producers, led by Saudi Arabia and Russia, met on Thursday and agreed on the parameters for continuing the export reductions that have supported the oil market recovery from the COVID-19 pandemic.
OPEC+ cuts to keep market tight
The OPEC+ alliance has been cutting output by about 5.8 million barrels per day (bpd) since May 2020, in response to the collapse in oil demand caused by the coronavirus outbreak. The group had planned to ease the cuts by 2 million bpd from September, but decided to postpone the increase amid concerns about the Delta variant and its impact on global economic growth and fuel consumption.
According to Reuters, Russia had agreed with its OPEC+ partners on the parameters for extending the cuts by another month, with an official announcement expected this week. Russia has already said it will reduce its exports by 300,000 bpd in September, following a 500,000-bpd cut in August. Saudi Arabia is also expected to roll over its voluntary 1-million-bpd cut into October.
The OPEC+ decision means that the global oil market will remain tight in the coming weeks, as demand recovers from the summer lull and supply disruptions persist in some regions. The International Energy Agency (IEA) said last month that it expects oil demand to exceed pre-pandemic levels by the end of 2022, while supply will struggle to keep up due to underinvestment and geopolitical risks.
Brent and WTI near multi-month highs
The anticipation of further supply cuts from OPEC+ has boosted oil prices in recent weeks, with both Brent and WTI futures reaching their highest levels since July. On Monday, Brent crude futures for November traded down 3 cents at $88.52 a barrel by 0648 GMT. U.S. West Texas Intermediate crude (WTI) October futures were unchanged at $85.55 a barrel.
Both contracts ended last week with gains of more than 3%, after two previous weeks of losses. Analysts said that oil prices were also supported by signs of economic recovery in some key markets, such as China and the U.S., as well as by geopolitical tensions in the Middle East and Afghanistan.
“Crude oil prices have been primarily driven by the anticipation of additional supply cuts from major oil-producing nations, Russia and Saudi Arabia,” said Sugandha Sachdeva, executive vice president and chief strategist at Acme Investment Advisors. Sachdeva added, however, that the steady increase in U.S. oil production could limit further significant gains in price.
Sour crude supplies remain tight
While the overall oil market is expected to loosen slightly in the next six to eight weeks due to refinery maintenance, some segments of the market will remain tight, especially for sour crude grades with higher sulphur content. Sour crude is preferred by complex refineries that can process heavier and dirtier oil into high-value products.
Speaking on Monday at the APPEC conference in Singapore, Vitol’s chief executive Russell Hardy said that sour crude supplies were scarce due to the OPEC+ cuts and other factors. “Because of the OPEC+ cuts, there’s not sufficient supply (of sour crude) for all these complex refineries in India, Kuwait, Jizan, Oman and China,” Hardy said.
Hardy also said that he expected oil demand to grow by about 4 million bpd next year, driven by gasoline and diesel consumption in emerging markets. He said that jet fuel demand would take longer to recover, as international travel remains restricted by COVID-19 measures.