Oil futures rallied Monday, with U.S. prices heading for their highest finish since 2014, after the Organization of the Petroleum Exporting Countries and its allies kept its current agreement to gradually raise crude production each month, including a 400,000 barrels per day increase in November.
“After undertaking dramatic cuts in the second quarter of 2020, the OPEC+ oil producer group has only gradually added supply back to a market that is seeing demand on a path to full recovery by 2022,” Peter McNally, global sector lead for industrials, materials and energy at Third Bridge, told MarketWatch.
On Monday, OPEC+ reaffirmed its July decision and will raise overall oil production monthly by 400,000 barrels a day in November. At the July meeting, OPEC+ said it would raise its overall production by 400,000 barrels per day starting in August until it fully phased out the production cuts in put in place last year.
The gathering was notable for its brevity and the fact that OPEC+ held to its original production plan.
By “only” adding 400,000 barrels per day of supply back to the market each month, McNally said experts at Third Bridge expect oil inventories to “continue to decline for the balance of the year. ”
However, OPEC+ continues to hold monthly meetings, which allows the group to “course correct quickly to the changing supply/demand outlook,” McNally said. So the producers it will “have the opportunity to gather and determine if an adjustment is needed in just a few weeks time.”
OPEC+ had been widely expected to keep its previous production plan in place.
November West Texas Intermediate crude climbed by $1.90, or 2.5%, to $77.78 a barrel on the on the New York Mercantile Exchange, with front-month prices poised to settle at their highest since November 2014, FactSet data show.
The December Brent contract, the international benchmark, meanwhile, was up $2.13, or 2.7%, at $81.47 a barrel on ICE Futures Europe, eyeing the highest finish since November 2018.
Based on the front-month contracts, WTI crude futures rose 2.6% last week and Brent crude ended nearly 2.7% higher for the period.
The outcome of the OPEC+ production policy has been “rapidly falling inventories over the last 15 months,” McNally said.
“At peak in June 2020, crude oil and refined product inventories in the OECD were more than 9% above their five-year seasonal averages,” he said. “By the end of summer 2021, stockpiles were more than 6% below normal.”
At the same time, “other sources of supply have been slow to respond to the price recovery in crude oil,” said McNally. “U.S. oil output was impacted by the effects of Hurricane Ida in late August, but more significantly, U.S. producers have been hesitant to increase drilling activity in all regions.”
Overall, the “result has been tepid supply growth,” he said.
Among the oil products traded on Nymex, November gasoline climbed by 2.5% to $2.307 a gallon and November heating oil tacked on 2.6% to $2.446 a gallon.
November natural gas was up 6.5% at $5.991 per million British thermal units, after climbing just over 8% last week, and ending September with a gain of 34%.