Oil Prices Surge Ahead Of OPEC+ Meeting: Market Anticipates Supply Cuts; Crude At 5 Month High

Oil prices surged yet again, propelled by signs of declining US crude inventories and anticipation surrounding the forthcoming OPEC+ meeting today. Global benchmark Brent inched closer to $90 a barrel, following a rally that saw it hit its highest level since October. Meanwhile, West Texas Intermediate (WTI) climbed above $85 per barrel, maintaining its upward trajectory.

According to reports from the American Petroleum Institute (API), nationwide stockpiles in the United States saw a significant decrease of over 2 million barrels last week. This drop was accompanied by declines in gasoline and distillate inventories, further fueling optimism among investors.

The OPEC+ alliance is slated to convene for an online meeting on Wednesday to review crude markets and supply policies. While officials predict that the group will likely uphold existing supply cuts, there are expectations of stringent measures against member nations that are surpassing their designated limits.

Throughout the year, oil prices have been on an upward trajectory, buoyed by geopolitical tensions and supply constraints. Attacks on Russian energy infrastructure by Ukraine, coupled with ongoing conflicts in the Middle East, have contributed to the bullish sentiment in the market. OPEC's concerted efforts to tighten supply have also played an important role, despite some members falling short of their agreed-upon production cuts.

In the options markets, there's a growing bullish sentiment, with traders increasingly hedging against further price hikes. Brent's second-month options skew has shifted from its typical put bias to a more pronounced preference for calls. This shift aligns with the broader market indicators, such as the deepening backwardation in timespreads, and signalling strength in the market.

Year-to-date, Brent crude has witnessed a surge, reaching $89 per barrel on Tuesday, up from $77 at the close of 2023. Analysts anticipate a relatively straightforward outcome from the impending OPEC+ meeting, reinforcing the decision to extend output cuts. The meeting, scheduled for 1 p.m. Vienna time, holds significance for global oil markets and investors alike.

At the previous OPEC+ meeting, held last month, member nations, spearheaded by Saudi Arabia and Russia, agreed to extend voluntary output cuts of 2.2 million barrels per day (bpd) in a bid to stabilize the market. These cuts, while voluntary, have not been uniformly implemented across all member states.

Russian Deputy Prime Minister Alexander Novak recently announced that Russia would focus on reducing oil output rather than exports in the second quarter. This move aims to balance production cuts across the OPEC+ alliance. As the voluntary curbs approach expiration at the end of June, total cuts by OPEC+ are set to decrease to 3.66 million bpd, in line with earlier agreements dating back to 2022.

The OPEC+ panel typically convenes every two months to deliberate on oil output policies, with recommendations subject to ratification in a full ministerial meeting involving all members. Comprising 23 oil-exporting nations, the OPEC+ group is instrumental in determining global crude oil supply. Central to this coalition are the 13 members of the main OPEC cartel, predominantly hailing from West Asian and African countries such as Iran, Iraq, Nigeria, and Libya.

Collectively, OPEC nations contribute approximately 30% of the world's crude oil production, with Saudi Arabia emerging as the largest producer within the cartel, producing over 10 million barrels per day. OPEC+ nations collectively account for around 40% of global crude oil production.

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