Oil Gains as OPEC Holds Steady on Output Increases

Supply-side concerns continue to underpin higher oil prices

Oil climbed today, continuing its 2022 upward march, after the Organization of the Petroleum Exporting Countries (OPEC) affirmed moderate output increases despite mounting pressure from consuming countries to ratchet up supply faster.

Key Takeaways

  • OPEC on Feb. 2 affirmed moderate crude oil output increases of 400,000 barrels per day, not buckling to pressure from consuming countries to accelerate production.
  • Oil continues to rise after January's 14% gain that was due to supply concerns and fears that Russia would invade Ukraine.
  • A lack of spare capacity by OPEC members has further complicated agreed-upon output targets.
  • U.S. crude inventories dropped more than expected last week, with stockpiles sitting below their five-year average.
  • Charts and trading data indicate that oil prices are likely to remain bullish in the short to medium term.

West Texas Intermediate (WTI) crude gained about 0.7% today, trading at $88.86 a barrel. Brent oil yesterday added 31 cents to close at $89.47 in New York. The recent gains follow a volatile month that saw oil prices climb 14% in January amid supply concerns and fears that Russia—the world's third-largest producer—would invade Ukraine.

OPEC+, a group comprising the world's major oil producers and exporters, confirmed its planned monthly increases of 400,000 barrels per day (B/D), cautioning that reducing investment in fossil fuels was adding to surging prices. Customers want producers to open the spigots wider to meet rising demand as economies recover from the coronavirus pandemic.

OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.

Spare Capacity Crimps Production

A lack of spare capacity by OPEC members has further complicated agreed-upon output targets, making it difficult for some states to meet production quotas. Although countries like Saudi Arabia could increase output, doing so may still drive oil prices higher by removing that backstop to guard against a global supply shock.

Meanwhile, a report prepared for the cartel's meeting cited by Reuters showed global oil demand growth remaining unchanged this year at 4.2 million B/D and forecast that demand would reach pre-pandemic levels in the second half of 2022.

"January has been a great month for oil prices, and $100 oil might not be too far away as expectations are high that supply will not come close to catching up with demand as OPEC+ will deliver gradual production increase targets that they will fall short of reaching," OANDA commodity analyst Ed Moya wrote in a note cited by S&P Global.

Oil Stockpiles Unexpectedly Decline

Oil prices gained further support on Feb. 2 after data from the Energy Information Administration (EIA) revealed an expected drop in crude inventories last week by 1 million barrels—analysts had expected stockpiles to grow by about that amount. Moreover, refining capacity fell 1% from the previous week to 87%, more than the 0.1% decline analysts had forecast. Overall, U.S. oil inventories sit at 415.1 million barrels, roughly 9% below their five-year average.

Crude oil stockpiles, also known as inventory, are reserves of unrefined petroleum measured in numbers of barrels. Oil producers and governments use crude stockpiles to smooth out the impact of changes in supply and demand.

Chart and Trading Data Indicate Bullish Sentiment to Remain

From a technical standpoint, Brent crude oil has consolidated above a six-month trading range, indicating that the bullish sentiment may continue in the short- to medium-term despite the relative strength index (RSI) sitting in overbought territory. Recent trading data also shows that oil bulls remain in control, with NYMEX crude net long positions rising in four of the past six weeks to the week ended Jan. 25.

However, a failure to push through the psychological $90 mark or a breakdown below the range's upper trendline could see a retracement down to the next key level of support at $77.75.

Chart depicting the price of Brent oil.
Article Sources
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  1. Statista. "Russian Oil Industry - Stats & Facts."

  2. OPEC. "25th OPEC and non-OPEC Ministerial Meeting concludes."

  3. Reuters. "OPEC+ Seen Sticking to Policy Despite Oil Price Rally - Sources."

  4. S&P Global. "Oil Futures: Crude Reaches 7-Year Highs as Market Eyes Tightening Supply Outlooks."

  5. MarketWatch. "U.S. Crude-Oil Stockpiles Unexpectedly Decline."

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