Oil ended the previous week with modest gain with demand picking up slowly despite the new wave of COVID cases that cast a shadow over prices moving higher. Prices, however, got support from shrinking US crude stockpile and signs of improving demand in China and India. There are, however, concerns that a rise in output, which was distorted by shutdowns forced by Hurricane Delta, could weigh on prices.
Markets got some reassurance from OPEC+ that it remains committed to production cuts. OPEC+ seem to have comforted markets that they are leading the oil market to balance.
Saudi Arabia and Russia reportedly reiterated their commitment to the OPEC+ production cut agreement. This raised the expectations that the alliance might take further action to either address some of its members under compliance or re-evaluate its plan to boost production from January.
OPEC+ sees a risk of an oil surplus next year if Libya's production revival might complicate the supply-side narrative.
Libya's output has climbed to around 5,00,000 barrels per day and some forecasts say it could rise to 7,00,000 barrels per day or more by year-end after the reopening of facilities in September that had been shutdown since January due to the civil war.
Crude bounced after weekly data from EIA showed a larger larger-than-expected fall in the US supplies, with inventories falling in all but two of the last 12 weeks.
The previous week’s decline was sharper than expected. Gasoline inventories decline and a much larger than expected drop in distillate stocks was a major support for markets. US crude stockpiles tumbled 3.8 million barrels with distillate inventories plunging by 7.2 million barrels.
It looks like markets are not worried about the inventory glut which ballooned in the second quarter as fuel demand collapsed and are falling at a clip of around 3 Mbpd.
Outlook
There were some bright spots for crude bull investors but the outlook remains challenged in terms of speedy recovery in crude oil and the resurgence of COVID cases and further lockdown measures.
All eyes are now on the second round of lockdowns, particularly in the US, the UK, India, and Europe, where product consumption is still well below pre-pandemic levels.
The JMMC that monitors compliance with production cuts is scheduled to meet later in the day. Markets are expecting some strong words on compensating for under compliance by some oil producers and it remains to be seen if there will be an action against the laggards this time or if the bashing will stay at a verbal level.
Risk remains if hopes of extending the production cut turn goes futile, then prices may be in danger again next week after the OPEC+ meeting, pushing prices to touch levels of $ 36-37. However, if OPEC+ shows a strong need for compliance and brings a balance in the market, crude can break levels of WTI $41 and move to levels of $44 a barrel.
(Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services.)
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