Oil Up On OPEC Optimism, But A Massive Selloff May Be Coming

Meanwhile, RBC's Croft warns to keep an eye on geopolitical tension: File Image/Pixabay

Oil prices on Tuesday enjoyed another session of gains, propelled by the Organization of the Petroleum Exporting Countries (OPEC) predicting a tight global market in 2022; however, storm clouds in the form of a massive U.S. selloff are forming, say experts.

West Texas Intermediate rose 91 cents to settle at $76.99 per barrel, while Brent gained $1.02 to $80 per barrel.

Earlier, OPEC predicted a surplus of 1.4 million barrels per day (bpd) in the first three months of 2022, about 25 percent less than it estimated a month ago, and this combined with the market structure remaining in a backwardation pattern (which indicates continued supply tightness) has sustained bullish sentiment.

Also, Alexander Novak, vice president of Russia, said in an interview with state Rossiya 24 TV that the rapid infection rate of omicron isn't reducing oil demand because of the low level of hospitalizations.

Ed Moya, senior market analyst for the Americas for Oanda, said of Tuesday's trading activity, "Prices are heading higher after OPEC+ showed they are more confident that the global crude demand outlook will only take a limited hit."

As for the highly anticipated meeting of OPEC and its allies on Tuesday, the 23-nation alliance led by Saudi Arabia and Russia approved the expected 400,000 bpd increase scheduled for February.

OPEC has already restarted about two-thirds of the production they halted in the early stages of the pandemic, however, with Angola and Nigeria among the member countries struggling to hit production targets, Amrita Sen, chief oil analyst and co-founder at Energy Aspects Ltd., pointed out that "Even if that headline number is 400,000, what's coming to the market is half of that, maybe even less."

Experts are also concerned that the yearly reshuffling of billions of dollars of commodity investments by the S&P GSCI Index and the Bloomberg Commodities Index will soon trigger a sharp bout of selling.

Bloomberg on Tuesday noted that "The pressure from financial flows will hit the benchmark U.S. crude futures contract at a time when prices remain elevated as recovering demand and still-constrained supply from OPEC and its allies help drain inventories."

Meanwhile, some analysts predicted that the global oil market will remain susceptible to geopolitics in 2022, with the Russia-Ukraine standoff and ongoing Iran nuclear negotiations cited as two key elements.

Helima Croft, head of global commodity strategy at RBC Capital Markets, remarked, "I do think it is these geopolitical wildcards that we have to pay very close attention to."