By Stephen Innes, Chief Global Market Strategist at Axi
Markets are looking for a relatively uneventful OPEC JMMC today. Not just because it’s technical/monitoring capacity is not empowered to make changes to OPEC policy, but because oil has been trading very well suggesting that it doesn’t signal the need for further near-term support from OPEC as demand in the physical market has been the driver of strong prices.
Still, the market will be keen to hear the unofficial commentary from OPEC member states about expectations for the remainder year, while framing how the OPEC agreement is working as intended, limiting downside pressure on oil despite the negative news flow about rising Covid-19 infections while logistical impasses on distributing the vaccine seemingly now an everyday event.
The key in this narrative is that OPEC members seem to be taking their commitment to output to heart with industry reports citing an unnamed OPEC delegate claiming that January compliance with the targets at 99%, with OPEC members 103 percent and non-OPEC at 93 percent.
There was even talk that Iraq plans to reduce production in January and February to compensate for failure to achieve its quota last year.
However, tanker tracking data suggests that Iraq may have failed to meet its goal of acquiring additional compensation oil production cuts in January, and may even still be above its OPEC+ quota. Iraq has been publicly criticized in the recent past by Saudi Arabia for non-compliance, and this repeated failure to achieve quotas may again become an issue.
It has been an exciting week for oil prices which continue to rise with WTI also breaching $54 per barrel quietly with little fanfare.
This move reflects the continued good compliance on the OPEC+ and a sense of relief that we have one of the worst winter months in the northern hemisphere behind us. But the winter cold snap in the NE US corridor should not be underestimated either.
My base-case remains for a demand-led rebalancing of the oil market, with the logistical challenges of vaccination transient in nature. The path for the vaccine roll-out, the trajectory for Covid-19 cases and the economic rebound implications are essential.
Virus mutations have undermined hopes of herd immunity and vaccination rollouts have been disappointingly slow. But we know that vaccines work and can be adjusted for new strains.
Oil continues to strengthen today with Brent just shy of US$58 a barrel before profit-taking set in. Considerable activity in the physical market is behind the move and is pushing the backwardation further. Shell purchased five cargoes of North Sea oil yesterday in the Platts (10-minute) window and placed bids for seven more which remained unfilled. To put that in perspective, typically one or two cargoes trade in the 10-minute window. Yesterday’s gigantic purchases were the most by a single company in at least a decade, according to media reports.
Demand in the physical market has been the driver of a strong front of the curve for this week fueled by news of OPEC+ production compliance at 99%. US vaccine rollout picking up steam in recent weeks are all getting framed as the Biden administration pushes for a colossal stimulus deal.
Optimism is also getting nudged forward as the northern hemisphere puts January behind. The frigid temperature and the massive snowstorm blanketing the US East Coast should not be underestimated from a heating oil perspective.
The big question is how this rapid price rise might open up another potential can of worms for OPEC as members will want to pump more oil not to mention US shale will be eager to step on the producing accelerators. Oh, to be a fly on the wall at the JMMC meeting.