Oil Rallies For Second Day As OPEC+ Considers Larger Output Cut

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(Bloomberg) -- Oil surged after OPEC+ said it was considering an output cut of as much as 2 million barrels a day, a million barrels higher than previously anticipated.

US benchmark West Texas Intermediate continued its rally, climbing back near $87 a barrel while the international benchmark Brent regained $92 as the Organization of Petroleum Exporting Countries prepares to meet in-person on Wednesday.

“The potential cut increasing from 1 million barrels a day to 2 million barrels implies a more aggressive approach,” said Stacey Morris, head of energy research at Alerian VettaFi. “It may signal greater concern around demand and the health of the global economy.”

Expectations of an OPEC+ output cut has boosted prices, with WTI rallying more than 5% on Monday in its biggest advance since July.

The OPEC+ meeting will force the group to decide whether supply is currently too generous given concerns about global oil demand, Vitol Group Chief Executive Officer Russell Hardy said at the Energy Intelligence Forum in London. The demand side of the oil market is clearly a concern at the moment.

Oil slumped 25% last quarter as central banks including the Federal Reserve raised rates aggressively to combat runaway inflation. The shift to tighter monetary policy spurred speculation of a sharp slowdown in global growth, hurting demand for commodities that were also hit by a surging dollar, though some of that strength cooled on Tuesday. Vitol's Hardy says he expects crude to trade at $85 next year, while Gunvor Group and Trafigura Group see potential for $100.

Meanwhile, Saudi Aramco's chief executive officer warned Tuesday that the global oil market's spare capacity is extremely low.

Read more: Aramco says global oil spare capacity to slump when China reopens

In recent days, the market's structure has firmed for the main oil futures contracts, indicating a more robust environment for crude and refined fuels. WTI's nearest timespread closed at its strongest since early August, while the same gauge for European diesel touched its firmest level since July

The OPEC+ gathering in Vienna will be the group's first in-person meeting since the pandemic forced the group online. In addition, ministers plan to hold a press conference after their session, the first such briefing since last year.

At present, many OPEC+ nations are unable to meet their production quotas in full given supply constraints. That means that any agreement on a headline reduction in collective output -- known as a paper cut -- would not lead necessarily to a commensurate drop in actual barrels given the mismatch. Cutting daily output by 1 million barrels would only lower real-world production by 500,000 to 600,000 barrels, Citigroup analysts said in a quarterly commodity outlook.

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