DTN Oil

WASHINGTON (DTN) -- After sideways trade for most of the session Thursday, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled higher. Investors reassessed near-term supply fundamentals after OPEC+ unexpectedly decided to proceed with a 400,000-barrel-per-day (bpd) production increase next month in a move that will likely exacerbate a buildup in global oil inventories early next year but reduce the cartel's own spare capacity faster than estimated.

OPEC+ Ministerial Committee Meeting concluded Thursday with a surprise decision to keep production quotas intact despite growing concerns over the rapid spread of the omicron COVID variant and signs of rapidly building global oil inventories. The group's technical panel estimated oil market is rapidly moving into oversupply, with gains in production seen outpacing demand by 2 million bpd next month and widening further to 3.4 million bpd in February. In March, OPEC+ expects surplus on the global market to reach a whopping 3.8 million bpd.

Making matters worse, the new COVID-19 variant has upended international air travel this week, triggering renewed quarantine controls and curbs on economic activity. Germany banned all unvaccinated people on Thursday from entering bars and restaurants and the United States tightened testing requirements on all international travelers entering the country. Japan and Israel have suspended all inbound flights for December.

Against this backdrop, traders upped their bets that OPEC+ would forgo a planned production increase until at least February to balance the market this winter. Analysts at JP Morgan estimated that a three-month pause of production increases is needed to reverse a restocking pattern in global inventories.

The surprise decision, meanwhile, could be a strategy to reduce OPEC+ spare capacity at a faster rate next year and to undermine investment in the U.S. shale industry. OPEC's "true" spare capacity next year is estimated at 2 million bpd or 43% below previously held consensus of 4.8 million bpd, according to JP Morgan. The cartel is already struggling to increase production in line with agreed quotas plagued by chronic underinvestment and political unrest in a number of African oil producing countries.

A Reuters survey published on Tuesday found OPEC pumped 27.74 million bpd in November, up 220,000 bpd from October, but that was below the 254,000-bpd increase allowed for OPEC members under the OPEC+ agreement.

Goldman Sachs said on Thursday that while OPEC+ has often reiterated caution over the past year, today's decision is consistent with past decisions to add supply in a weaker demand environment. And it eases tensions with the U.S. administration, which coordinated the release of national stockpiles among major oil consuming countries last month after U.S. crude prices rose to a seven-year high.

Meanwhile, recent market volatility will likely make U.S. shale producers more cautious in their spending plans for 2022, according to Goldman. Domestic oil production spiked to an 18-month high 11.6 million bpd last week, up nearly 600,000 bpd from the start of the year.

On the session, West Texas Intermediate January futures advanced $0.93 to settle at $66.50 per barrel (bbl), and the international benchmark ICE February Brent contract gained $0.80 to $69.67 per bbl. NYMEX RBOB January futures moved up 1.66 cents to $1.9677 gallon, and the front-month NYMEX ULSD contract added 2.63 cents to $2.1034 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com