There is nothing to do on the oil market, which continues to be tight. What would generally be considered a big deal under usual circumstances has largely become a non-event as the market has been unimpressed with OPEC+’s decision to increase production. Recall that Saudi Arabia, leader of OPEC+ which includes Russia, had gradually undone production cuts of 0.43 million barrels per day over the past three months.
The production increase for the next two months has now been promised at 0.65 million tonnes, 50% more than the last three months. This represents about 0.8% of global oil demand, but it has proven insufficient to tame the bulls in the oil market. In fact, the market responded with a $2/bbl rally, just to put the discontent on the record.
Not that there is no confidence in OPEC’s ability to deliver on its promise. On the contrary, the cartel has exceeded expectations, sticking to plans, with leaders making up for the delays experienced by smaller contributors in the recent past. The level of compliance has been close to 100% since the production freeze took place during the Covid peak.
Market participants believe that the impact of the OPEC decision is insufficient to counter the next uptrend, as the slowdown in global demand is not as imminent as previously feared. Europe has also finalized plans to ban more than 90% of oil imports from Russia by the end of the third quarter of 2022. This is taking a significant share of the global oil market. Note that Russia is still a major player as bans and sanctions are not fully in effect.
On top of that, market leader Saudi Arabia, seeing the rising premiums in the oil refining market, raised the price of the Saudi basket of oil variants. And that too, right after OPEC+’s decision to pump more oil for the next two months. The Kingdom’s signal further reinforces the market’s long-held belief that OPEC takes back what it gives up – almost always.
On the other hand, the rapidly dwindling US strategic reserves are seen by many as a sign of tougher times ahead for supplies. The United States is doing its part to keep pump prices from spiraling out of control, to avoid a situation where there are no buyers at gas stations. In doing so, the drawdown on reserves has increased, adding the risk premium in the near future, which should coincide with Russian oil facing tougher sanctions than today.
China is gradually making a comeback too, after yet another Covid setback. And the comeback is proving to be faster than last time, which will likely keep the pressure on Brent and WTI. Countries like Pakistan can only watch with hope from afar. Things continue to be bullish in the oil market.