Oil prices drop below $90 as OPEC+ commit to supply boost
Market rallies on both major benchmarks have stalled this morning, with Brent Crude prices dipping below $90 per barrel amid speculation OPEC+ could further increase supply targets this week.
Prices remain close to the seven-year highs reported yesterday, with Brent Crude dropping 0.52 per cent to $88.80 per barrel, with WTI Crude falling 0.53 per cent to $87.68.
Analysts had been expecting OPEC+ to maintain its policy of gradual production hikes at a meeting on Wednesday of 400,000 extra barrel per day, Goldman Sachs said there was a chance of further steps being made.
The investment bank said: “We view growing potential for a faster ramp-up at this meeting, given the pace of the recent rally and the likely pressure from importing nations. The producers’ group may also be growing more concerned by the hawkish central bank shift that could lead to slower global growth and oil revenues later this year.”
The group’s modelling also pointed to a potential $3 per barrel impact if OPEC+ brought forward its planned April hike worth an extra 200,000 barrels per day.
However, their overall outlook on oil prices this year remains buoyant.
It said: “Such an OPEC+ move would not change our bullish view, however, simply representing a shift in the risk-reward of being long oil this week. In fact, the rapid decline in Covid cases, the strength of demand so far this year and initial earnings releases of US producers, guiding production below expectation, all reinforce our conviction in the need for sharply higher prices.”
OPEC+ members have been routinely missing production targets in recent months, with Angola, Nigeria, Congo and Equatorial Guinea underproducing amid capacity constraints.
According to a Reuters survey, output from the ten OPEC countries involved in the agreement failed to reach the 250,000 barrels per day increase that had been agreed – missing the target by over 20,000 barrels.
Meanwhile, fears of increased tensions between Russia and the West over the future of Ukraine could also constrain supplies with the possibility of both sanctions and supply disruptions if the Kremlin instigates conflict in the region.
However, oil has faced pressure from bullish US supply reports, which show an increase in crude stockpiles over recent weeks with analyst anticipating levels have risen to 1.8m barrels.
Whether this will weigh down on prices amid such compelling macro factors remains to be seen, as Commerzbank continues to be optimistic about the potential for rising prices.
The bank’s analyst Carsten Fritsch said: “It will probably be only a question of time before Brent absorbs the effect of the contract rollover again. The news backdrop also suggests that we have not yet seen the end of the upswing.”
He also noted that plunging temperatures are looming in Texas over the next few days, which could also affect the Permian Basin, the largest US shale play.