Oil plunges to $83 a barrel on Opec supply hopes

The global oil benchmark, Brent dropped as much as 6% to trade below $83 a barrel, the lowest since January.

Global crude oil prices extended declines as Saudi Arabia and other Opec countries were reported to be discussing an output increase, while China was said to be tightening its anti-Covid curbs, hurting the outlook for demand.

The global oil benchmark, Brent dropped as much as 6% to trade below $83 a barrel, the lowest since January. Declines accelerated after the Wall Street Journal reported Opec+ is considering an output increase of 500,000 barrels ahead of the EU’s embargo of Russian oil. If confirmed, the production increase would come as market sentiment has shifted, with the price of physical barrels dropping. 

The market’s weakness is bleeding into multiple gauges of oil’s supply and demand balance. Brent crude's prompt spread briefly traded in contango, an industry term for when current oil prices are cheaper than contracts for delivery further out. 

China saw its first Covid-related deaths in almost six months over the weekend, just as a city of 11 million near the capital asked residents to stay home amid an outbreak, sparking fears of a further wave of restrictions in the world’s biggest oil importer. 

Crude has erased the gains made at the start of the quarter, when the Organisation of Petroleum Exporting Countries and allies including Russia agreed to reduce production by 2 million barrels a day. 

Output targets

Last month, Opec+ unexpectedly decided to reduce output targets sharply and it would be unusual for the group to increase production at a time of declining prices and concern about the economic outlook.

The Wall Street Journal said talk of a production increase has emerged after US President Joe Biden's administration told a federal court judge that Saudi Crown Prince Mohammed bin Salman should have sovereign immunity from a US federal lawsuit related to the killing of Saudi journalist Jamal Khashoggi.

The immunity decision amounted to a concession to Prince Mohammed, bolstering his standing as the kingdom's de facto ruler after the Biden administration tried for months to isolate him, the newspaper said.

A looming EU ban on Russian seaborne oil and Group of Seven price-cap plan are clouding the outlook, with officials possibly set to announce the cap’s level on Wednesday as they step up their response to Moscow’s invasion of Ukraine. 

Forecast reduction

Goldman Sachs lowered its fourth-quarter forecast for Brent crude by $10 to $100 a barrel, according to a research note, with the reduction driven in part by the possibility of further anti-virus measures in China as cases climb.

Expectations of further increases to interest rates have buoyed the dollar, making dollar-denominated commodities like crude more expensive for investors. 

"Apart from the weakened demand outlook due to China's Covid curbs, a rebound in the US dollar today is also a bearish factor for oil prices," said CMC Markets analyst Tina Teng.

"Risk sentiment becomes fragile as all the recent major countries' economic data point to a recessionary scenario, especially in the UK and eurozone," she said. 

Bloomberg and Reuters