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OPEC+ meets to decide on production boost, expecting a tight oil market ahead

Highlights

Traders expect ministers to approve 400,000 b/d output hike

OPEC+ analysis shows robust oil demand through end-2021

Hurricane Ida, COVID-19 uncertainties to factor into decision

OPEC continues to forecast robust oil demand in the months ahead, bolstering the case for the bloc and its partners to keep raising output, despite a volatile market that is still assessing the impact of Hurricane Ida and stubbornly high COVID-19 infections.

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The OPEC+ alliance is scheduled to meet Sept. 1 to decide whether to press on with plans to hike crude production by 400,000 b/d every month, as it seeks to eventually eliminate its historic output cuts implemented at the start of the pandemic.

A slight slump in oil prices, with many economies still struggling to contain the spread of the coronavirus, may have given some members doubts, but analysis presented by the OPEC secretariat to a technical committee co-chaired by Saudi Arabia and key non-OPEC ally Russia on Aug. 31 indicated no need for a pause.

The forecast said the market will increasingly tighten in the third and fourth quarters of this year, delegates in the closed-door meeting told S&P Global Platts, with US production growth still stunted, while consumption is expected to keep rising.

"It seems that the market can absorb the 400,000 b/d [increase] for the next months, [though] of course, uncertainties around COVID continue," one delegate said, on condition of anonymity.

Traders are largely expecting OPEC+ ministers to heed the guidance. Keeping a lid on production could stoke inflation across major economies and destabilize the recovery from the pandemic.

Dated Brent prices have rebounded back above $70/b after starting August on the decline and sinking to a four-month low of $66.17/b on Aug. 19.

"Doesn't feel like OPEC+ will reverse course in this meeting with flat price where it is," a crude oil trader in Singapore said.

Another trader with a South Asian refinery said: "Flat price is strong and any trimming [in supplies] will increase fuel prices and lead to inflation."

However, delegates said that no decision had yet been made, and the OPEC+ alliance has sometimes wrong-footed traders with a surprise.

A nine-minister advisory committee is scheduled to convene at 4 pm Vienna time (1400 GMT), followed by the full OPEC+ ministerial meeting at 5 pm (1500 GMT).

2022 surplus looms

The impacts of Hurricane Ida on crude production and refining in and around the Gulf of Mexico will also be considered, delegates said.

The storm, which ravaged Louisiana and Mississippi on Aug. 29, forced some 1.7 million b/d of US offshore production to be shut in, as well as about 2.2 million b/d of refining capacity.

US officials will be closely monitoring fuel prices, having already complained to OPEC earlier this month that it should be more aggressive in hiking production to cool off the gasoline market. OPEC+ delegates have dismissed the White House pressure as domestic posturing.

Beyond 2021, the OPEC+ alliance's intentions bear watching, as several forecasters, including the OPEC secretariat, say supply-demand balances will likely flip into surplus in the first quarter of 2022, due to seasonal factors, causing oil inventories to build again.

Many OPEC+ countries have already been clamoring to produce more to regain market share lost during the pandemic, raising tensions with other members that favor a more go-slow approach, as well as producers that do not have as much spare output capacity.

Successful Iran nuclear negotiations could also add more supply if US sanctions on Iranian oil sales are lifted, though no resumption in the stalled talks appears imminent.

However, 2022 production policy may be too far off for OPEC+ ministers to consider at this meeting. The alliance has said it plans to convene every month to remain nimble in the face of market uncertainties.

OPEC ministers are next tentatively scheduled to meet in late September in Baghdad to celebrate the organization's 60th anniversary in a celebration postponed from 2020.