Oil Climbs with OPEC+ Signaling More Gradual Supply Hike

(Bloomberg) -- Oil advanced with OPEC+ producers reaching a tentative agreement to add limited supplies to the market in the coming months.

Futures in New York rose as much as 3.7% on Thursday to the highest intraday level since 2018. Negotiations between OPEC+ producers, including the alliance’s de facto leaders, Saudi Arabia and Russia, are still underway, delegates said, as ministers gathered online. The proposal under discussion would add about 2 million barrels a day to the cartel’s output between August and December, they said.

“OPEC is looking like it’s going to keep some restraint, and to me, the market is in a really good place,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “People are very comfortable and constructive with the profile over the next year.”

Oil posted the best half since 2009 as prices grind higher, aided by a global recovery taking place from the U.S. to Europe and China. Crude inventories in the U.S. are falling at the fastest rate in decades with shale producers remaining disciplined. Citigroup Inc. expects the oil market to remain in a deep deficit even after accounting for higher OPEC+ output through the summer.

Along the oil futures curve, the market structure strengthened and timespreads moved deeper into backwardation, a sign of supply tightness. The nearest West Texas Intermediate crude contract was $1 more expensive than the next month at one point. The sharp gains at the front end of the futures curves for Brent and WTI are a sign that traders are banking on extreme market tightness in the coming weeks.

“It’s a pretty huge move, to be honest with you,” said Babin. “And it definitely indicates that over the next several months, there’s probably going to be difficulty getting enough crude oil for the summer driving season in the U.S.”

As oil prices rose, another energy market saw even stronger gains. European natural gas prices hit an all-time high on Thursday. The two markets are at times connected, as some gas contracts have a link to the crude and fuel-oil markets.

Implementation of the OPEC+ agreement would be conditional on the status of talks between Iran and the U.S., which are seeking to revive their nuclear pact and potentially lift sanctions on the Islamic Republic’s oil exports, delegates said. The deal would also extend the expiry date for the overall OPEC+ cuts agreement from April to December 2022, a delegate said.

“We absolutely think prices are going to continue to rally, especially if OPEC adds anything 500,000 barrels per day,” Amrita Sen, chief oil analyst at consultant Energy Aspects, said in a Bloomberg Television interview. “It’s a drop in the ocean.”

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