Oil Futures Gain as OPEC Cuts World Demand, Output Outlook

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange and the Intercontinental Exchange Brent contract advanced in early trade Wednesday as the Organization of the Petroleum Exporting Countries reduced its outlook for global oil demand and production from non-OPEC producers for this year and 2023.

Modest gains by West Texas Intermediate and Brent crude follow a two-day slide from six-week highs reached in response to the Oct. 5 OPEC+ decision to cut oil production by 2 million bpd beginning in November, while the market anticipates a promised response from an angry White House.

OPEC in its Monthly Oil Market Report released this morning revised lower non-OPEC liquids production by 340,000 bpd in the fourth quarter to 66.78 million bpd, and expects output in 2023 at 67.13 million bpd, revised down 380,000 bpd from September. For the first quarter 2023, non-OPEC liquids production was revised down a sizable 600,000 bpd to 66.56 million bpd.

MOMR determined "solid increases in oil and gas rig counts and high fracking activity" in the United States are expected to support strong output, but "[l]ower-than-expected tight oil production in recent months necessitated a downward revision to the US liquids supply growth." OPEC said, "severe inflationary pressure, coupled with logistical bottlenecks and shortages of material and labour, are posing additional challenges."

Saudi Arabia has defended its decision alongside 12 other OPEC countries and 10 non-OPEC oil producers led by Russia to agree to slash the OPEC+ output quotas beginning next month because of lower demand expectations. In today's MOMR, OPEC analysts revised down fourth quarter world oil consumption expectations by 780,000 bpd to 101.64 million bpd, and now sees 2022 global demand growth at 2.64 million bpd and consumption at 99.97 million bpd, revised down by 350,000 bpd. For 2023, OPEC projects world oil consumption at 102.02 million bpd, revised down 710,000 bpd, with first quarter 2023 demand cut by 480,000 bpd from September's outlook to 101.33 million bpd.

In making the downward revisions, OPEC cited extended restrictions in China because of Beijing's zero-COVID-19 policy, along with "economic challenges" in developed economies in Europe. MOMR also cited inflationary pressures in "key economies which could taper overall demand."

On Tuesday, Reuters reported rising lockdowns and various degrees of controlling population movement in China amid an increase in infections blamed on greater domestic travel earlier in October for the National Day "Golden Week" holiday. Citing the findings of Japan's Nomura Holdings, Reuters said 36 cities in China were under various degrees of lockdown or control affecting 196.9 million people on Monday, up from 179.7 million the prior week.

The White House has been vocal over its disappointment of last week's OPEC+ decision, with the production cut agreed to despite heavy lobbying by the Biden administration for no cuts. The White House said Saudi Arabia's decision in reducing production despite high global inflation and energy security challenges in Europe means the kingdom has sided with Russia and supports President Vladimir Putin's war in Ukraine.

In an interview with CNN, U.S. President Joe Biden said there would be consequences for U.S.-Saudi relations without saying what they would be. Reuters cited comments from Saudi Foreign Minister Prince Faisal bin Farhan who said the OPEC+ decision was purely economic and reached unanimously by its member states.

Biden and Saudi Crown Prince Mohammed bin Salman Al Saud who oversees the Saudi government's day-to-day activity for his father, King Salman bin Abdulaziz Al Saud, have had what can best be called a fraught relationship. In a week's time the rift has grown exponentially, including geopolitical consequences for the decades-long security relationship between the United States and the kingdom as Washington now considers halting arm sales to the Saudis.

Traders are closely watching what action the Biden administration might take to shore up supplies, having said on more than one occasion since Oct. 5 that it might release more oil from the Strategic Petroleum Reserve. The Biden administration has also floated the idea of a partial or full ban on U.S. exports of refined products, however industry experts have said such an action would lead to less refinery production. A July study by the American Council for Capital Formation said an export ban would lead to the shutdown of 1.3 million bpd of refining capacity, about 7% of the U.S. total.

Near 8 AM ET, NYMEX November WTI futures were up $0.20 at $89.55 bbl, and ICE December Brent futures gained $0.46 to $94.75 bbl. NYMEX November ULSD futures were more than 6cts higher at $3.9925 gallon, and the November RBOB contract gained 1.5cts to near $2.6425 gallon.

Brian L. Milne, 1.402.255.8020 , brian.milne@dtn.com, www.dtn.com.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne