Opec and its allies will stay the course and bring 400,000 barrels per day of crude to the market in March amid higher demand as global economies continued to recover from the coronavirus pandemic and amid growing supply concerns due to geopolitical tensions in Eastern Europe.
Opec+, led by Saudi Arabia and Russia, agreed to increase production next month during an online meeting on Wednesday, the group said in a statement on Wednesday.
Oil prices have rallied to their highest since 2014 on tighter supply, higher demand and production constraints. Brent, the global benchmark for two thirds of the world's oil, was trading at $90.27 per barrel at 5.01pm UAE time on Wednesday. West Texas Intermediate, the gauge which tracks US crude, was trading at $89.38 a barrel.
Crude has remained buoyant in the past few weeks as geopolitical tension continues to rise in Eastern Europe. The Pentagon has placed 8,500 US troops on high alert after Russia stationed thousands of troops along the border with Ukraine.
Russia further boosted its troop presence in the weekend in a sign of a potential escalation that could derail the flow of global energy supplies.
“Oil prices around $90 per barrel are a sign of a bullish mood and supply fears,” Norbert Rucker, head of economics and next generation research at Julius Baer, said. “The fundamental basis for such frothiness are low storage levels after the past year’s swift economic rebound overwhelmed the energy business in ramping up production in time.”
The Ukraine crisis adds to the fears, although the risks of meaningful Russian oil export disruptions appear low, he said.
"Such nervousness seems to be a characteristic behaviour of ‘peakish’ markets, and there is a possibility for prices to temporarily move even into the triple digits.”
Oil could trade higher due to geopolitical tensions and the inability of Opec+ countries to raise production to reach their quotas, said Edward Moya, senior market analyst at Oanda.
“Fears of disruption to supplies will remain elevated given the winter blast hitting the north and the geopolitical risks abroad,” he said.
Oil prices have rallied more than 10 per cent this year and Brent touched a seven-year high of $91.70 per barrel last week while crude has risen more than 67 per cent in the past year.
The ability of some Opec member countries to quickly ramp up production is shrinking, according to a new report from Bank of America. However, rising capacity among GCC Opec members, a potential return of Iranian barrels, and non-Opec supply growth should help ease oil balances over the medium term.
Saudi Arabia, the UAE, and Kuwait will help add roughly 3 million barrels per day to their combined capacity over the next eight years, the report said.
Ipek Ozkardeskaya, senior analyst at Swissquote, also expects crude prices to hit three-digit levels in the coming months "given that global glut declines faster than expected due to a stronger recovery in demand and ongoing supply constraints".
The market is expected to remain undersupplied in the near term unless the global powers reach a deal on Iran on its nuclear programme, according to Exinity Group's chief market analyst Han Tan.
At the same time, global demand remains resilient as risks associated with the spread of the Omicron variant fade.
“Such supply-demand dynamics are preserving a tight market structure, building a solid platform for oil benchmarks to climb higher and build on January’s gains of over 15 per cent," he said.
"A spike in geopolitical tensions could even trigger another surge in oil prices, potentially bringing $100 oil closer to reality.”
Opec+ said on Wednesday it will meet again on March 2 to assess the market situation and decide its future production policy.
The Opec+ group achieved a historic reduction of 9.7 million barrels per day between May 2020 and July last year but has tapered the cuts as demand improved. The group is adding 400,000 barrels per day to the market every month.
