(Bloomberg) — Oil dropped as the dollar pared losses ahead of a key OPEC+ meeting scheduled this week that may lead to producers increasing supply into a fast-tightening market.
Futures in New York fell as much as 2.5% Monday to the lowest in a week. The alliance gathers on Thursday and is expected to loosen the taps after prices got off to their best ever start to a year. But it’s unclear how robustly the group will act, with the Saudi Arabian energy minister calling for producers to remain “extremely cautious.”
See also: OPEC+ Faces Calls to Cool Oil Market Frenzy With Extra Barrels
The market continues to face risks in the near term. China’s Unipec was re-offering cargoes of April Angolan crude amid weaker sales. Diesel demand in India was also down versus a year earlier amid record pump prices in the country. Both point to a limit on some of the recent firmness seen within the oil market.
“OPEC potentially putting more supply on the market could undercut some of the strength” prices have experienced lately, said John Kilduff, a partner at Again Capital LLC. The backdrop for the market is “mostly supportive, but this additional slug of OPEC supply if it were to develop is definitely a limiting factor.”
Saudi Arabia’s output curbs, the improving demand outlook as vaccines are rolled out, and the growing popularity of commodities as a hedge against inflation have pushed oil higher this year. There has been a raft of bullish calls in recent weeks predicting the rally will continue as the producer response trails consumption, while maintenance in North Sea fields is set to reduce supply. Meanwhile, there are some signs that demand is picking up. U.S. gasoline demand jumped by 1 million barrels a day last week to 8.76 million barrels a day, a level comparable to March 2020 before the pandemic, according to Descartes Labs.
“People have become very optimistic about the ability of OPEC+ to manage a return to a balanced market,” said Michael Lynch, president of Strategic Energy & Economic Research. The market continues to “see improved demand down the road and OPEC+ not oversupplying the market as they ramp up again.”
The Organization of Petroleum Exporting Countries and its allies must decide how much output gets restored — and at what pace — with current reductions amounting to just over 7 million barrels a day, or 7% of global supply. The 23-nation coalition will choose whether to revive a 500,000-barrel tranche in April, and in addition, whether the Saudis confirm an extra 1 million barrels they’ve taken offline will return as scheduled.
Citigroup Inc. thinks the coalition will boost output by about 500,000 barrels a day next month, with Saudi Arabia unlikely to continue its voluntary curbs.
“A higher oil-price environment, an increasingly promising demand picture by summer, and the recovering but still growing U.S. oil production outlook for 2021 should give OPEC+ the confidence to slightly increase supply,” said Louise Dickson, an analyst at consultant Rystad Energy AS.
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