Oil Futures Reverse Higher as OPEC Misses Output Quota

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in afternoon trade Monday, with all petroleum products finishing the session higher. This followed industry surveys showing the Organization of the Petroleum Exporting Countries and 10 allied partners missed their August production target, heightening concerns over tight supplies on the global market.

OPEC+ oil production fell short of its target level by a record 3.58 million barrels per day (bpd) in August, according to an industry survey released Monday, which has significantly widened the gap between the group's pledged output and delivered production. The coalition's 10 participating OPEC members, led by Saudi Arabia, accounted for 1.399 million bpd of the August shortfall, while their non-OPEC partners underproduced by 2.185 million bpd.

Russia, severely constrained by Western sanctions, missed the target by a massive 1.252 million bpd, with deeper losses expected later this year with the onset of a European Union-wide embargo on Russian seaborne crude exports.

Within OPEC, Nigerian production was 700,000 bpd short of its August quota amid ongoing infrastructure issues and security concerns.

OPEC+ August production quota was 43.854 million bpd. OPEC+ agreed on a 100,000-bpd increase for September, which will be effectively reversed in October.

Officials have repeatedly highlighted dwindling capacity within the group and the need for additional investment globally in the oil and gas sector. The OPEC+ Joint Technical Committee studies market conditions that feed the group's policy decisions will next meet on Oct. 4 ahead of the Oct. 5 ministerial meeting to determine November's production policy.

November Brent futures on the Intercontinental Exchange settled $0.65 higher at $92 per barrel (bbl). October West Texas Intermediate futures on NYMEX, which expires Tuesday afternoon, advanced $0.62 to $85.73 per bbl Monday, with the November contract settling with a $0.37 discount to the expiring contract.

NYMEX ULSD October futures rallied 13.83 cents to settle the session at $3.3108 gallon, and the front-month RBOB contract gained 4.84 cents for a $2.4641-per-gallon settlement.

The U.S. dollar index, which has an inverse relationship with WTI, strengthened for the third session, finishing Monday at 109.982. Earlier this month, the dollar index spiked to a 110.785 more than 20-year high amid rising bets that the Federal Reserve will have to hike interest rates aggressively this week, and at their two remaining meetings in 2022 to draw down excess liquidity from the market.

In financial markets, Dow Jones Industrials closed nearly 200 points higher, snapping a two-day losing streak ahead of the Federal Open Market Committee's Tuesday-Wednesday meeting. According to CME Group's FedWatch Tool, the market overwhelmingly, 80%, expects the FOMC Wednesday afternoon to announce the third consecutive 75-point basis rate increase that would boost the federal funds rate to a 3% by 3.25% target range. Some think the rate hike could be even larger, with 20% speculating a 100-point basis increase following the Sept. 13 Consumer Price Index reading for August, which increased 0.1% from July while core inflation surged 0.6%.

The hotter-than-expected August CPI reading caught the market off-guard, dashing expectations that the Federal Reserve would quickly gain control of rising prices this year, and begin cutting the key overnight lending rate as soon as 2023. The August reading suggests, however, inflation is stickier than previously appreciated by the market, likely forcing the central bank to continue to lift rates aggressively and holding them higher for longer. Indeed, 83% expect a federal funds rate between 4% and 4.5% in mid-December, the FOMC's final meeting of 2022, according to the FedWatch Tool.

Higher interest rates slow economic growth, and the Fed's rate hikes are increasingly seen likely in tipping the U.S. economy into global recession. The Atlanta Fed GDPNow estimates third-quarter U.S. gross domestic product to have increased 0.5% following its most recent update on Sept. 15, down from a 1.3% growth rate on Sept. 9 before August's CPI reading. The nowcast indicator will again update Tuesday.

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

Liubov Georges