Oil Jumps 4% on OPEC+ Cuts Mantra

© Reuters.

By Barani Krishnan

AiVIF.com -- Buy the rumor and sell the fact — eventually that is.

Crude prices jumped some 4% Monday as buyers plowed into a market where expectations were growing by the day for production cuts by the enlarged OPEC+ cartel.

The 13-member Saudi-led Organization of the Petroleum Exporting Countries and its ten oil-producing allies steered by Russia will meet on Sept. 5.

Almost every country in the 23-strong alliance, save for Saudi Arabia and the United Arab Emirates, are producing below quota now.

Yet, avarice seems to be growing within the cartel that oil prices should recapture the highs from earlier this year, when global crude benchmark Brent was trading as high as $140 a barrel in the aftermath of the Ukraine invasion and U.S. crude stood at almost $130. Brent is almost $40 below those peaks and U.S. crude more than $30 lower.

The grand plan among OPEC+’s less significant members is that cuts be announced at next week’s meeting and that the Saudis and Emirates carry those reductions — as has been the norm in the alliance for most of the past two years.

“It’s the same story each time,” said John Kilduff, partner at New York energy hedge fund Again Capital. “Crude prices drop $20 or more a barrel and these OPEC+ guys will be yelling cut, cut, when they’re producing well below quota. They’ll make whatever noise they can between now and the next week to try and get the market up as much as possible.”

“My reckoning is by the following week, the price will tumble again unless the Saudis and the UAE are willing to cut substantially of what they are producing,” said Kilduff.  “I’m not sure how much of their market share the Saudis and the UAE will want to risk with deep cuts. Unless they do such cuts, market sentiment will probably weaken again as we’re entering the seasonally lower demand period for oil. That’s when sell-on-the-fact will come.”

Ed Moya, analyst at online trading platform OANDA, concurred that OPEC+ will try pushing its luck as much as possible for higher prices.

“The supply side risks are too great and prices need to find a home above the $100 a barrel level” for producers to get less noisy on prices, said Moya.

At Monday’s settlement, New York-traded West Texas Intermediate crude, the benchmark for U.S. crude, closed up $3.95, or 4.2%, at $97.01 per barrel. WTI rose 2.5% for all of last week, after the previous week’s decline of 1.4%.

Brent crude, the London-traded global benchmark for oil, finished the session up  $4.10, or 4.1%. Last week, Brent jumped 4.4%, versus the previous week’s slide of 1.5%.

OPEC+ production cuts aside, sentiment in oil was also boosted by renewed conflict in Libya, and rising demand amid soaring natural gas prices in Europe that helped offset a dire outlook for growth in the United States.

Heavy clashes in Libya's capital which killed 32 people on the weekend sparked concern that the country could slide into a full-blown conflict, which could again disrupt crude supply from one of OPEC’s larger producers.

In Europe, higher natural gas prices in Europe were spurring power generators and industrial users to switch to diesel and fuel oil, further supporting crude prices

Oil prices have been on an upward trajectory of late. A flurry of support was expressed on Friday by OPEC+ member states, including Iraq, Venezuela and Kazakhstan, about readiness within the 23-strong oil producing alliance to intervene and restore balance in the oil market.

A week earlier, OPEC+’s de facto chief Saudi Arabia said the group could cut production “anytime,” after its secretary-general Haitham Al Ghais of Kuwait hinted that output restraint could be an option for bringing the market back into balance.

“Balance” is OPEC+’s catchphrase for production cuts, a situation it deems necessary whenever oil prices are at the risk of a continuous decline.