Oil Supported By Modest OPEC Output Agreement But Market Needs More, Say Experts

Citi is the lone voice arguing that oversupply is on the horizon: File Image/Pixabay

The expected decision on Wednesday by the Organization of the Petroleum Exporting Countries (OPEC) to maintain a modest output hike of 400,000 barrels per day in March caused oil prices to climb modestly, with analysts insisting the market is "screaming out" for a more substantial increase of the commodity.

Brent settled up 31 cents to $89.47 per barrel, while West Texas Intermediate gained 6 cents to $88.26 per barrel.

Of Wednesday's muted trading, Phil Flynn, senior market analyst at Price Futures Group Inc., said, "There's a lot of resistance up near $90, so we saw some profit taking" earlier in the session.

Stephen Brennock, analyst at oil broker PVM, wrote in a note, "The expected announcement of a supply hike will likely feed the price rally; this is because it will be interpreted as a reduction in OPEC+ spare capacity rather than a rise in global oil inventories."

Still, oil remains in backwardation, inventories are still declining (U.S. crude stockpiles fell by 1 million barrels last week according to the Energy Information Administration), demand across the world is stronger than ever, and these factors caused Edward Bell, senior director of market economics at Emirates NBD, to tell Bloomberg television that OPEC's modest boost for next month would be tough for the cartel to achieve in such a short time frame.

He added that only Saudi Arabia, United Arab Emirates, Kuwait, and Iraq could increase supply quickly to make up the output shortfall of other countries and satisfy a market that is "screaming out" for additional oil.

But not every analyst thinks the current situation is sustainable: Ed Morse, global head of commodities research at Citi, said his outlook is "slated toward the bearish side" and that he believes the market will be oversupplied with oil by the second quarter of this year, even if OPEC delivers less than it promised; he noted as an example that Russia is spending "an incredible amount of capital" to bolster production, and that U.S. shale "is massive in the equation."

And as far as Brennock is concerned, demand destruction is still possible as climbing oil prices could potentially help persuade a more aggressive response from central banks to tame energy-driven inflation.

As for events that could affect oil trading in the days to come, a major winter storm is expected to slam into much of the central U.S. and stretch to parts of the Northeast this week; also, Washington on Wednesday said it will send nearly 3,000 troops to Poland and Romania to reinforce Eastern European NATO allies as the alliance continues to engage in diplomatic efforts with Russia and Ukraine.