It wasn’t exactly a surprise move, but it has sent oil prices to their highest levels in years. On Monday, 4 October, OPEC and its non-OPEC partners, collectively called OPEC+, announced plans to increase output by 400,00 B/D in November.
Within hours of the decision, both of the biggest globally traded benchmarks saw intraday prices jump by more than 2%.
December contracts for the chief global benchmark Brent crude rose by more than $2 and broke past the $81/bbl handle for the first time in 3 years. November futures for West Texas Intermediate (WTI), the US benchmark, also jumped by more than $2 and traded above $78/bbl—the highest price since 2014.
OPEC+ is sticking to the agreement struck in July which marked the end of the historic 9.7 million B/D production cut made in response to COVID-19’s crushing impact on demand. Under the current plan, the group is to add production by 400,000 B/D each month until the end of 2022.
Crude prices have surged by more than 50% this year as the global economy begins to recover from the slowdown on trade and commerce imposed by the pandemic. Rising natural gas prices are also pushing oil prices higher as electricity providers in Asia and elsewhere seek to secure an alternative supply ahead of the winter months.
Going into the latest ministerial meeting some analysts considered the possibility that OPEC+ may respond to rising crude prices with an 800,000 B/D increase. Had this been the decision, it was expected to be accompanied by an agreement to not increase output in December.
Bjornar Tonhaugen, Rystad Energy’s head of oil markets, said in a note that even though the OPEC+ decision to stay the course “was no surprise” to most traders, it nonetheless spurred markets to price in the potential of tighter supplies.
“It’s not that OPEC+ does not recognize the coming supply shortage,” he added. “The group is well aware of the global inventory draws, maintenance work, and rising demand, but chose to wait until later this year to adopt a bolder supply approach.”
OPEC+ ministers will meet again on 4 November to decide whether to increase output. In the meantime, Rystad said traders and analysts will need to keep a closer eye on how the demand side of the equation holds up to higher energy costs.
“The recovery of the economy, the potential of a cold winter, and fuel switching from gas to oil in Asia suggest a rather quick demand increase to as much as 100 million [B/D] in December, but if prices keep on rising, the elasticity of oil demand may kick in as consumers, out of cost reasons, cut consumption,” said Tonhaugen.
