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Oil Rebound Slowed by OPEC's Caution on Demand for Pricey Crude

CommoditiesNov 11, 2021 15:26
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By Barani Krishnan - Oil bulls anticipating supportive words from the world’s biggest producers got a dose of reality instead as OPEC cautioned on Thursday that high prices could hurt demand for the crude it pumps.

"A slowdown in the pace of recovery in the fourth quarter of 2021 is now assumed due to elevated energy prices," the 13-member Organization of the Petroleum Exporting Countries said in its monthly report. 

The Saudi-led OPEC also cited slower-than-expected demand in China and India — the second and third largest oil importers, respectively — for the downward revision.

Oil bulls, who’ve treated any pessimistic outlook on crude prices this year like water off a duck’s back, sent crude prices higher by Thursday’s settlement to steady the market after a sharp selloff the previous day, triggered also by worries of inflation from high energy prices.

West Texas Intermediate, the U.S. crude benchmark, settled up 25 cents, or 0.3%, at $81.59 per barrel, after initially spending the day in the red on the OPEC outlook. On Wednesday, WTI lost 2.8% in its biggest tumble in a week that came after seven-year highs above $85 in October.

London-traded Brent crude, the global benchmark for oil, gained 23 cents, or 0.3%, to settle at $82.87. Brent fell 2% in the previous session after scaling a three-year high above $86 last month.

OPEC, part of the larger OPEC+ alliance that groups its original 13 members with 10 other producers steered by Russia, said it expects  demand for its oil to average 99.49 million barrels per day in the fourth quarter of 2021, down 330,000 bpd from last month's forecast. 

Overall, it trimmed its forecast for the year's demand growth by 160,000 bpd to 5.65 million bpd.

The trade’s response to the OPEC outlook was understandable, given that most members of the cartel are price hawks first. To put it in perspective, the near 70% rally in crude this year was primarily caused by Saudi refusal to add meaningfully to production as demand for energy ramps up in a world emerging from the coronavirus pandemic.

The Saudis have maintained for months that the larger OPEC+ alliance should not add more than 400,000 bpd to global production in the foreseeable future — even as energy experts say the world needs at least a million bpd more in the near-term to cool crude prices.

In fact, some analysts saw OPEC’s downward revision of its demand forecast as a sly attempt to reinforce its policy of not allowing OPEC+ to add more than 400,000 bpd to its exports.

To be fair, some oil producing countries are really having trouble revving up their output after keeping them low for more than a year during the pandemic. 

But the Saudis and Russians have virtual turn-on, turn-off switches for additional production, granting the status of “swing producers”.

“Whether the acknowledgement of higher prices affecting economic activity and demand will encourage the group to increase output more at an upcoming meeting is another thing,” said Craig Erlam, analyst at online trading platform OANDA.

Oil Rebound Slowed by OPEC's Caution on Demand for Pricey Crude

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