Oil prices are keeping the faith that OPEC will come good on staving its supplies from global markets, even as the alliance tries to keep it together amid an internal squabble.
A confluence of factors between the anticipation for an OPEC delay to its supply restoration plans and optimism over the global economic recovery, are stacked against the lingering dampeners of the pandemic, keeping Oil prices hovering around their highest levels since April, despite the recent dip.
Recall that OPEC was slated for a meeting earlier this week to decide on the timing of its next output hike. That meeting failed to produce any conclusive outcome, and talks are set to resume later today.
Here’s a quick recap on the key phases of the OPEC supply response to the global pandemic so far:
- May: OPEC reduced output by 9.7 million barrels per day (bpd), as the pandemic wrought havoc on global demand.
- August: The output cuts were scaled back to 7.7 million bpd, amid signs that the worst of the pandemic was over.
As things stand, OPEC is slated to ease up on its production cuts by another 1.9 million barrels per day, starting January.
Brittle recovery fuels OPEC conundrum
There are concerns that Oil prices can’t be sustained at current levels without OPEC holding back on its existing plans to restore more supplies next month. This is due to the notion that the overall health of global demand is still too fragile going into 2021.
Consider the figures out of the air travel industry.
Airlines in the US have slashed their January schedules by a daily average of nearly 4,000 flights, while Europe is expected to see a 50-60 percent drop in flights over the first two months of 2021. Such forecasts show that demand will need more time to recover, even as the US has just witnessed its deadliest day ever from Covid-19, while Germany and Italy have either extended or tightened their respective lockdowns. These major economies likely have to battle the effects of the coronavirus for some time more, even with a vaccine.
In contrast, China, the world’s largest oil importer, remains a bright spark! 11,700 domestic flights took place in China on 1 December alone, while inner city traffic is also close to pre-pandemic levels. Keep in mind that most of OPEC's Oil goes to Asia.
Such uneven figures are giving some OPEC members pause about restoring too much supply too soon. Other members are raring to pump out more so as to generate income for their fiscal coffers.
Oil-related stocks also hanging on to OPEC decision
The uncertainty isn’t just seizing up benchmark Oil prices, but also keeping the stocks of Oil companies in limbo. Consider BP’s stunning 26.36 percent gain in November, as the company’s stock rose in tandem with the 24.69 percent climb in Brent futures last month.
Such gains would only hold up if OPEC can overcome their differences and deliver the outcome that markets are expecting. Otherwise, markets could be in for a nasty shock.
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