WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced more than 4% early Monday following reports suggesting the Organization of the Petroleum Exporting Countries and Russia-led partners could slash collective oil output by more than 1 million barrels per day (bpd) for the month of November in their bid to support prices against losses in global oil demand.
If agreed upon, a production cut of more than 1 million bpd would be the largest reduction in OPEC+ output since April 2020 when the group slashed collective production by 9.7 million bpd to offset demand destruction brought by the global pandemic. Russia, the group's second largest producer, has reportedly lobbied for the larger cut as it struggles to expand its export markets under the weight of international sanctions and needs higher prices to capitalize on existing sales.
Saudi Arabia, OPEC's de-facto leader, voiced similar concerns following the recent sell-off in oil futures, with the international crude benchmark Brent contract losing more than 20% of value during the third quarter. Riyadh has indicated on multiple occasions higher oil prices are required for additional investment into the energy space, pointing to limited spare capacity by OPEC+.
At their Sept. 5 meeting, OPEC+ surprised the market with a 100,000-bpd production cut for October, which was seen as a sign that producers are ready to change course on policy.
Analysts, however, caution that OPEC+ is currently missing its output target by 3.5 million bpd due to tight spare capacity and poor infrastructure, meaning a 1 million bpd reduction would likely translate into only a 400,000-bpd decline in actual oil output.
This comes amid a bitter standoff between Russia and the West, with many European countries deeply concerned about the prospect of recession and a winter gas shortage. Russian gas giant Gazprom suspended natural gas deliveries to Italy over the weekend after failing to receive authorization for the pipeline flows through Austria. For their part, Austrian authorities said Gazprom had not signed up to changes in supply contracts required by regulatory adjustments that are made every year, and which Gazprom had known about for months. Gazprom, Austria's government, and Italian energy company Eni SpA said they were working to find a solution.
EU countries have imposed sweeping financial and trade restrictions on Russia that will get tougher later this year with the introduction of an embargo on Russian seaborne oil exports scheduled to take effect on Dec. 5.
Meanwhile, inflation in the European Union have climbed in September to the first ever double-digit reading of 10%, up from 8.6% at the start of the third quarter. Energy and food once again drove inflation, though an underlying measure that excludes the two volatile categories also topped estimates to reach an all-time high of 4.8%.
Domestically, inflation failed to moderate in the third quarter, albeit the rise in consumer prices is more modest compared to European countries. In September, headline inflation in the United States eased to 8.3% from a year earlier, still unacceptably high, but core consumer prices powered higher despite the retreat in the gasoline index.
Such data have proven critical in driving momentum toward large rate hikes from the Federal Reserve that raised the federal funds rate 0.75% for the third consecutive month in September. Stronger-than-expected gains in the labor market do not help that sentiment, solidifying the case for the central bank to continue aggressive rate hikes until unemployment begins to tick higher, relieving pressure on consumer prices. The odds for the Fed to manage a soft landing for the world's largest economy have been scaled back in recent weeks.
Near 7 a.m. EDT, November West Texas Intermediate futures spiked more than $3.25 to $82.80 barrel (bbl), and ICE December Brent futures rallied to $88.50 bbl, up $3.36. NYMEX November RBOB futures advanced nearly 10.5 cents to $2.4745 gallon, with the front-month ULSD futures surging 12 cents to $3.3416 gallon.
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