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Oil Rally Pauses Seeking More Clarity on OPEC Cut, U.S. Response

Published 10/05/2022, 09:39 PM
Updated 10/05/2022, 09:43 PM
© Reuters.

By Ambar Warrick Oil prices kept to a three-week high on Thursday, but appeared to have paused a recent rally as markets awaited more clarity on how the OPEC+ intends to carry out a massive supply cut, as well as a U.S. response to the move. 

London-traded Brent oil futures fell 0.2% to around $93.59 a barrel, while West Texas Intermediate crude futures rose 0.2% to $87.95 a barrel. Both contracts rallied about 2% on Wednesday and are up sharply this week.  

The Organization of Petroleum Exporting Countries and its allies (OPEC+), said on Wednesday it will cut supply by 2 million barrels per day (bpd) in order to counter recent weakness in crude prices, defying pressure from the United States to increase supply. 

The move, coupled with signs of a bigger weekly drawdown in U.S. crude inventories, spurred a sharp rally in oil prices, helping them recover further from an eight-month low hit in September. 

But the OPEC+ provided scant details on which of its members would cut supply, and when the cut would be implemented. The cartel also did not address how the cut would factor into a 3.5 million bpd shortfall in its daily production target. 

U.S. President Joe Biden indicated that the government is likely to respond to the OPEC cut by releasing more oil from its Strategic Petroleum Reserve (SPR). The Biden administration has already drawn the SPR to its lowest level since 1984, in a bid to reduce fuel prices ahead of the November midterm elections. 

Analysts cautioned that crude markets are likely to see increased volatility in the coming days, as more information is released about the cut and the U.S. plans to counter it. Goldman Sachs argued that the real size of the OPEC cut, considering the supply shortfalls, would actually be about 500,000 bpd. 

But the investment bank still raised its fourth-quarter oil price target to $110 a barrel. 

Strength in the dollar, stemming from hawkish signals from the Federal Reserve, is also expected to keep a lid on crude prices, while weakening global economic growth is expected to keep the demand outlook constrained. 

But on the other hand, further tightening of crude supply, due to sanctions against Russia, is likely to benefit prices. A harsh European winter is also expected to help prices by pushing up demand for heating oil.  

Crude prices have plummeted from annual highs on fears of weakening demand, especially in major importer China.

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