OPEC+ producers have shown great flexibility in adapting their output cuts scenario as the market dictates. Such flexibility may again come into play as the group considers whether to agree to a three-month extension to the current 7.7 million barrels per day (bpd) of output cuts as they prepare to meet next week.
We have not seen the kind of upward momentum of the market over the last week since April, even if the fundamentals have not really changed. What we have seen is a recovery in sentiment, tied firmly to hopes that the new COVID-19 vaccines may mark the beginning of the end of this crisis.
Brent at around $50 is an important psychological barrier for the speculative trading of oil futures, representing a breakout from the narrow range of trading we have seen for most of the year. But what is significant for speculators may be less so for the producers of OPEC+.
Still, the rapid vaccine-fueled recovery in the oil price has taken the market by surprise as many observers had not anticipated such a rebound until the second quarter of next year at the earliest.
This is why the forthcoming meeting of OPEC+ producers next week is so intriguing. The latest compliance data (which measures whether producers are really cutting as much as they say they are) shows a strong commitment to earlier agreed cuts. Now they must consider two competing influences on the future direction of the oil price.
In the West we see low demand and low refining capacity and in the East we see high demand and optimism around higher refining capacity.
Recent supply increases from Libya may be a distraction from the push and pull of these two much bigger forces, which is what the producers of OPEC+ will need to grapple with next week.
The latest reported commercial oil inventories data for the Organization for Economic Cooperation and Development countries for the month of September show that oil inventories are at 211.9 million barrels above the five-year average. Back in March, these were at 88.6 million barrels above the five year average.
Going back to March 2018, commercial oil inventories were 40 million barrels less than the last five years average at the time, suggesting that OPEC+ output cuts that started in January 2017 were successful in absorbing stocks below the latest five year average only after 15 months from the start of OPEC+.
The elevated inventories that have accompanied the pandemic are different to anything we have previously seen, which underlines the continued need for close OPEC+ monitoring.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.