More Gains For Oil As Speculation Of OPEC Output Cuts Intensifies

Meanwhile, Europe sees more countries returning to fossil fuel power: File Image/Pixabay

Concern that the Organization of the Petroleum Exporting Countries (OPEC) may enact the largest output reduction since the pandemic when it meets on Wednesday triggered another round of strong gains on Tuesday.

However, instead of fears in the previous session that OPEC's cut would be 1 million barrels per day (bpd), Bloomberg reported  that the cartel was considering a 2 million bpd reduction.

The news agency pointed out that such a cut "would reflect the scale of the producer group's concern that the global economy is slowing in the face of rapidly tightening monetary policy."

Brent settled up $2.94, or 3.3 percent, at $91.80 per barrel, and West Texas Intermediate settled up $2.89, or 3.5 percent, at $86.52 per barrel.

Fitch Solutions said in a note, "We expect a substantial cut to be made, which will not only help to tighten the physical fundamentals but sends an important signal to the market."

Goldman Sachs took the stance that the cut is justified, considering the sharp decline in oil prices from recent highs.

There's little doubt the market is tight, precariously so at a time when demand seems largely unruffled by adverse conditions such as inflation: according to sources citing American Petroleum Institute figures, U.S. crude oil and fuel stockpiles fell by about 1.8 million barrels for the week ended Sept. 30, while gasoline inventories fell by about 3.5 million barrels and distillates fell by about 4 million barrels.

For its part, UBS said several factors could send crude prices higher toward year-end, including "recovering Chinese demand, OPEC+ further supply cut, the end of the U.S. Strategic Petroleum Reserve (SPR) release and the upcoming EU ban on Russian crude exports."

With regards to the latter, a senior U.S. Treasury official said G7 sanctions on Russia will be implemented in three phases, first targeting Russian oil, then diesel and then lower-value products such as naphtha; the G7 and European Union bans are set to begin on Dec. 5.

But arguably the most obvious takeaway from the current geopolitical tension between Russia and Europe is the latter's mistake in embracing alternative energy policies too quickly and depending on the former Soviet Union for traditional fuels: energy firm Orsted reportedly is to continue or restart operations at three fossil fuel facilities after being ordered by Danish authorities to do so.

Mads Nipper, CEO at Orsted, told media, "We still believe that we, as a society, must phase out the use of gas, oil, and coal as soon as possible, but we're in the middle of a European energy crisis, and we will, of course, contribute to ensuring the electricity supply to the best of our ability."

This comes on the heels of Germany's RWE stating that three of its lignite (or brown coal) units would "temporarily return to [the] electricity market to strengthen security of supply and save gas in power generation."