OPEC Output Reduction Threat Continues To Boost Oil Prices

Insiders in Asia are especially concerned about the possible consequences: File Image/Pixabay

Oil prices on Tuesday enjoyed a substantial hike on the strength of a weakened U.S. dollar but especially due to the lingering notion that the Organization of the Petroleum Exporting Countries (OPEC) may reduce output to better correlate futures prices with fundamentals.

West Texas Intermediate for October delivery settled up $3.38 at $93.74 per barrel, while Brent for October settlement rose $3.74 to settle at $100.22 per barrel.

In the previous session, traders were galvanized when prince Abdulaziz bin Salman, oil minister for Saudi Arabia, told media that "The paper and physical markets have become increasingly more disconnected….witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve."

On Tuesday a spokesperson at SK Innovation Co. (South Korea's biggest producer) said the Saudi comments are "boosting uncertainty around prices as well as the whereabouts of refining margins and the refinery-planning process."

The spokesperson, who wished to remain anonymous, added, "The move will accelerate the increase in oil prices, bringing more uncertainty going into the winter, when heating demand is poised to rise with a European energy crunch."

Indeed, Bloomberg on Tuesday noted that European power prices have soared "so much that they're now equal to more than $1,000 per barrel of oil."

The news agency said Russia's gas supply cuts have pushed prices to about 13 times the commodity's seasonal norm and added that coal-fired plants will provide little relief because that commodity has also hit a record.

Other insiders weighed in on OPEC's bid to keep prices higher: Lin Keh-Yen, spokesman for Formosa Petrochemical Corp. of Taiwan, theorized the cartel foresees "that demand may slow down or even retreat, so they are taking this action in advance to maintain the supply-demand situation.

"They will try to maintain a price close to $100; if prices go even higher, that will cause severe inflation and will cause demand to go down."

Bob Yawger, director of energy futures at Mizuho, pointed out that the possibility of Iran's return to the international energy export stage combined with recession fears and the upcoming U.S. refinery maintenance season has pushed prices lower: "That is the situation that's getting the Saudi oil minister a little bit beside himself; he was stressing the point that the dynamics were a bit out of whack with reality."

But nine OPEC sources told Reuters on Tuesday that production cuts would only occur if Iran ratified a nuclear deal with the West, and even though the Islamic republic has dropped some key demands in a bid to resurrect such a deal it's still unclear what the outcome will be.

Meanwhile, moving forward, Stacey Morris, head of energy research at VettaFi, said of near-term factors sure to influence traders, "Market observers will be closely watching U.S. inventory reports to see if the recent strength in gasoline demand has held up."