There is nothing doing at the oil market, which continues to be tight. What would be usually considered a big deal in usual circumstances, became largely a non-event, as the market was unimpressed by Opec+ decision to ramp up production. Recall that Saudi led Opec+ that includes Russia had gradually bene unwinding the production cuts to the tune of 0.43 million barrels a day for the last three months.
The production increase for the next two months has now been promised at 0.65 million tons – 50 percent higher than last three months. That is around 0.8 percent of world oil demand, but that proved insufficient to tame the oil market bulls. In fact, the market responded with a $2/bbl rally, just to put the displeasure on record.
Not that there is not confidence out there in Opec’s ability to keep its promise. If anything, the cartel has overdelivered against odds, sticking to the plans, with the leaders making up for delays faced by smaller contributors in the recent past. The compliance level has been close to 100 percent since the production freeze took place during peak Covid.
The market participants opine the impact of Opec’s decision is insufficient to counter the next bull run, as global demand slowdown is not as imminent as was feared earlier. Europe has also finalized plans to ban more than 90 percent of oil import from Russia by the end of Q3 2022. That takes a sizeable chunk out of the global oil market. Mind you, Russia is still a major player as bans and sanctions are not in full force.
On top of that, the market leader, Saudi Arabia, seeing the rising premiums in the oil refining market, has raised the price of Saudi basket of oil variants. And that too, right after Opec+ decision to pump more oil for next two months. The signaling from the Kingdom further strengthens the long-held belief in the market that Opec takes back what it gives in – almost always.
On the other spectrum, USA’s rapid drawdown of its strategic reserves is seen by many, as a sign of tougher times to come as regards supply. The USA is doing its bit to keep the pump prices from going out of control, to avoid a situation where there are no buyers at gasoline stations. In doing so, the reserve drawdown has increased, adding the risk premium for the near future, which is likely to coincide with Russian oil facing sterner sanctions than today.
China is gradually making a comeback too, after yet another Covid hiccup. And the return is proving to be swifter than the last time, which will likely keep pressure on Brent and WTI. Countries like Pakistan can only watch in hope from the distance. Things continue to look bullish in the oil market.