OPEC+ to determine the oil price tag
The soaring price of oil is an increasing concern for the White House, as it is for major oil consuming economies like China and India. Few people expected prices to rise above $80 while some parts of the world continue to struggle with Covid-19. But the ongoing disruption in the Gulf of Mexico after Hurricane Ida and the global natural gas crunch have created a major headache for policymakers.
The demand/supply deficit is on the rise and is expected to remain above 1 million barrels a day for a couple of months. Neither the return of Iranian supply or US shale can cover this deficit.
That means it’s all in the hands of OPEC+ to determine whether oil will get closer to a three-digit figure or there is a ceiling on prices.
We are at a critical moment in the global economic recovery as rising energy prices for longer leads to higher inflation which has ripple effects. Central banks will have no option but to tighten monetary policies prematurely, the cost of servicing corporate debt will increase dramatically, consumers will begin to feel a drop in real income and profit margins for many corporates will decline. Equity investors should also worry as current elevated valuations will no longer be justified if interest rates increase above what is currently expected.
The OPEC+ meeting today will have a big say in where energy prices go in the near term.
The cartel previously decided to boost production by 400,000 b/d each month until end of 2021. It’s clear now that this output increase is far from meeting current demand. While oil producing countries are satisfied with prices near $80 a barrel, they are also concerned that higher prices for a prolonged period of time will begin to impact demand. On the other hand, they know that competition will return at some future date. The question is whether OPEC+ wants to benefit the most from the current shortage in supply or take fast action in rebalancing the market and retain market share.
If OPEC+ sticks to its current plan and only increases production by 400,000 for November, I wouldn’t be surprised to see oil prices adding another $10 in the next few weeks.
The group has the option to increase production by more in November and reduce it by the same magnitude over the following months.
It’s going to be tricky to find the right balance, but we should expect to see big moves in prices whatever decision the group announces later today.