(Bloomberg) — Oil’s impressive 2021 rally is coming unstuck just days before OPEC+ meets to decide just how much crude it should return to the market.
Futures in New York traded near $60 a barrel, dropping for a third day to head for the longest losing run since December. The alliance meets on Thursday to decide on easing supply curbs after prices posted their best ever start to a year before the current skid. Ahead of the gathering, Saudi Arabia has urged members to take a cautious approach even as signs of tightening emerge.
The latest decline in prices may help to strengthen the Saudi stance, according to Stephen Innes, chief global market strategist at Axi. “That’s probably something that could sway the OPEC+ increase more back toward the 500,000 barrels per day as opposed to the 1.5 million,” he said.
Crude roared higher in the opening two months of 2021, aided by the deep OPEC+ supply cuts, which include unilateral reductions by the Saudis. The roll-out of vaccines and an investor charge into commodities have also underpinned the gains, which pushed prices in New York to the highest close since 2019.
Investors are “a little bit unsure whether OPEC will continue with the support they provided over the last few months with the supply cuts,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. If there’s a higher-than-expected increase, that could make things difficult in the short term given demand is still showing signs of fragility, he said.
The Organization of Petroleum Exporting Countries and its allies must decide how much output is to be restored, with current reductions totaling just over 7 million barrels a day. The grouping is the largest actor in the oil market, with collective production covering more than 40% of worldwide demand.
OPEC+ still has plenty of scope to restore production, according to Goldman Sachs Group Inc., which estimates there’s a “massive” deficit of 2 million barrels per day at present. The pace of draws during the recovery will likely outstrip the group’s ability to ramp up, the bank warned in a March 1 report.
Investors will get clues later Tuesday on the market’s dynamics and outlook with Amin Nasser, chief executive officer of Saudi Aramco, and Mike Wirth, his counterpart at Chevron Corp., among the roster of speakers due to address IHS Markit’s annual CERAWeek conference, which is virtual this year
As OPEC+ weighs its next move, group leaders Saudi Arabia and Russia need to judge the likely response by U.S. shale producers. While most big publicly traded explorers in the U.S. are planning to keep output flat, smaller, private companies are seeking to grow supply after this year’s rally.
The runway to the Thursday’s full OPEC+ meeting starts later Tuesday with the group’s Joint Technical Committee gathering. The JTC’s role is to review market conditions and members’ conformity with supply agreements.
Brent’s prompt timespread was 66 cents a barrel in backwardation on Tuesday. While that’s a bullish structure — with near-dated prices above later-dated ones — it’s the lowest reading since mid-February.
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