Opec+ gets oil price to its sweet spot, the trick is keeping it there

The trick for Opec is getting US$90 to act as an anchor around which the price can trade with the usual daily volatility. — Reuters

THERE was no surprise that a top meeting of the Organisation of the Petroleum Exporting Countries and its allies’ (Opec+) ministers opted to keep output policy unchanged since the global crude oil market is almost exactly where the exporter group wants it.

Opec+’s ministerial committee on Wednesday kept the current output targets but did note that some countries had been over-producing and had undertaken to increase compliance.

This means that the voluntary production cuts of 2.2 million barrels per day (bpd) will remain in place until at least the end of June, joining the existing 3.66 million bpd of cuts agreed in 2022.

The voluntary production cuts are led by Saudi Arabia and Russia, the top exporters in the group.

Crude oil prices have rallied in recent months, with benchmark Brent futures hitting a six-month high and coming within one US cent of US$90 a barrel during Wednesday’s trade.

Lower production from Opec+, tensions in the Middle East from the Israel-Hamas conflict, and signs of stronger demand have all contributed to Brent’s rally from a low of US$72.29 a barrel on Dec 13 to the close of US$89.35 on Wednesday.

Opec+ doesn’t formally target an oil price level but it’s believed that most of the member countries currently favour a price closer to US$90 a barrel than the US$70 levels from late last year.

With the price now at that level, the trick for Opec+ is getting US$90 to act as an anchor around which the price can trade with the usual daily volatility, which is often driven by news headlines on events that threaten supply or change anticipated demand.

The risk is that US$90 a barrel is surpassed and crude heads back toward US$100, which is likely to fuel a new round of inflation in importing countries, as well as hurting anticipated demand growth.

Brent averaged about US$82.10 a barrel in 2023, so any level well in excess of that will add to inflationary pressures and make monetary easing by central banks all the harder to deliver.

Stronger oil prices may also crimp demand, especially in the price-sensitive developing economies in Asia, the world’s top importing region.

Asian demand has accelerated in recent months, with LSEG Oil Research data showing March imports of 27.33 million bpd, up from 26.68 million bpd in February and the highest since June last year.

China, the world’s top crude importer, led the way with March arrivals of 11.68 million bpd, up from February’s 11.16 million bpd.

India, Asia’s second-largest crude buyer, saw imports of 5.07 million bpd in March, up from February’s 4.55 million bpd as the South Asian nation bought more Russian oil, with imports from the Western-sanctioned nation coming in at an eight-month high of 1.53 million bpd.

While Asia’s crude demand is robust, the same can’t be said for its refinery margins, which have been squeezed by higher oil prices that haven’t been matched by price increases for refined products.

The profit margin on turning a barrel of Dubai crude into products at a typical Singapore refinery dropped to a four-month low of US$4.22 a barrel on April 2, before recovering slightly to end at US$4.33 on Wednesday.

The margin has shrunk 56% since the high so far in 2024 of US$9.91 a barrel, reached on Feb 13.

The question for the market is whether higher crude prices and under pressure refining margins will result in Asian import demand growth weakening, or whether the economic recovery story in China and the ongoing strength in India will be enough to keep demand robust.

Certainly, recent history suggests that China tends to trim imports when its refiners believe prices have risen too high, too quickly, and they turn to inventories to keep throughput high if demand warrants it.

But any reduction in imports by China comes with a lag to movements in prices as it takes around two months from the time oil is bought for it to physically arrive at a Chinese port. — Reuters

Clyde Russell is a columnist for Reuters. The views expressed here are the writer’s own.

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