Oil Rebounds On Wishful Lockdown Thinking And Realities Of Tight Supply

Meanwhile, the EU continues to squabble over the proposed price cap: File Image/Pixabay

The realities of tight global supply galvanized oil traders on Wednesday, and this coupled with hope of Chinese demand recovery caused the commodity to settle up by over $2 per barrel.

Brent settled up $2.40, or 2.8 percent, to $85.43 per barrel, while West Texas Intermediate settled up $2.35, or 3.01 percent, to $80.55 after it was learned that the Organization of the Petroleum Exporting Countries (OPEC) would hold its Dec. 4 meeting virtually, which according to a source with knowledge of the matter signals little likelihood of a policy change.

Helima Croft, head of commodity strategy at RBC Capital Markets, said, "Opting for no-drama optics seemingly increases the likelihood of a rollover decision; the OPEC work-from-home decision increases the focus" on the impact of European Union sanctions on Russia, which take effect on Dec. 5.

Last week, prince Abdulaziz bin Salman, energy minister for Saudi Arabia, warned that OPEC was "ready to intervene" with further output reductions if it was determined that supply and demand required balancing.

The OPEC speculations came on the heels of news from the Energy Information Administration that U.S. stockpiles dropped by 12.6 million barrels in the week ended Nov. 25, the most since June 2019.

Also influencing Wednesday's trading was the International Energy Agency, which believes Russian crude production will be curtailed by 2 million barrels per day (bpd) by the end of the first quarter next year, as the former Soviet Union will not supply oil to countries participating in a price cap for its invasion of Ukraine.

As for China, optimism of economic recovery stemmed from reports that Wednesday saw fewer Covid infections than on Tuesday, thus prompting optimists to speculate that an ease of travel restrictions will soon follow (Guangzhou relaxed some rules on Wednesday).

Ed Moya, senior market analyst at Oanda Corp., enthused, "If China's Covid rules are slowly eased and OPEC stays the course, crude prices could rally another 5-10 percent here."

Meanwhile, in the ongoing saga of the talks for the proposed caps, Poland, Estonia, and Lithuania are pushing for the cap to be set at $30 per barrel, $10 more than the estimated production costs for Russia.

The rest of the European Union is reportedly backing the original cap proposal, despite criticism that it's already the price Russia is getting for its oil and will not reduce oil revenues.