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Oil rebounds on expectation of further Opec+ cuts

Speculation-led selling remains a key theme driving volatility, analysts say

Oil prices surged on Monday amid expectations the Organization of Petroleum Exporting Countries (Opec) and its allies will not only extend output cuts but possibly even deepen them during their upcoming meeting.

Brent crude futures rose 34 cents to $80.95 a barrel by 0915 GMT. U.S. West Texas Intermediate crude was up 31 cents at $76.20.

The front-month December WTI contract expires later on Monday while the more active January futures gained 38 cents to $76.42.

The upward momentum follows a four-week decline of 20 per cent in prices driven by reduced concerns over Middle East supply disruptions caused by the ongoing Israel-Hamas conflict, oil market analysts said.

"In light of last week's obliteration of oil bulls, some kind of response was forthcoming from the producer group," said Tamas Varga of oil broker PVM. "If additional cuts are agreed, a short-term price boost is expected, but its longer-term price impact seems dubious as enforcement and adherence will be the salient issue."

JPMorgan strategists expect the Opec meeting scheduled for November 26 to deliver an extension of existing production cuts.

“However, we don’t rule out a scenario of deepening the cuts by up to a million barrels to pre-emptively clear potential demand weakness in the first half of next year associated with a worse-than-expected developed markets-led recession,” JPMorgan strategists Christyan Malek, Otar Dgebuadze and Marko Kolanovic wrote in a note.

Moreover, speculation-led selling remains a key theme driving the volatility, they said, adding that it is likely that demand destruction in developed markets is in the back of many investors’ minds.

“Our statistical model of Opec decisions suggests that deeper cuts should not be ruled out given the fall in speculative positioning and in time spreads, and higher-than-expected inventories,” said Goldman Sachs analysts.

Despite demand surpassing their optimistic projections, Goldman Sachs' analyst Daan Struyven said oil prices had remained somewhat subdued this year.

“We believe that Opec will ensure Brent is in a $80- $100 range by leveraging its pricing power, with a $80 floor from the Opec put and a $100 ceiling from spare capacity.

“While higher non-Opec supply or lower GDP are downside risks to prices, we estimate that Brent would remain close to $80 unless Opec became less assertive.”

Market analysts project a moderate daily deficit in oil supply by 2024, driven by strong demand, decelerating US supply growth and prolonged lower Opec supply.

This scenario is expected to push Brent prices to a peak of $95 per barrel by August 2024, with an average of $92 throughout the year.

While the baseline forecast assumes existing production cuts persist into 2024, with Saudi Arabia’s unilateral cut extended, market analysts anticipate potential further increases.

IG analyst Tony Sycamore suggested WTI prices might approach $80 a barrel if Opec+ announces deeper cuts.

Investors are also monitoring potential disruptions in Russian crude oil trade due to sanctions on ships involved in transporting Sokol crude to India.

ANZ Research, in its strategy note, anticipates crude oil prices to remain volatile but still exceed $90 per barrel by year-end, with a potential to rise to $100. “We continue to see some upside risks to this scenario should geopolitical tensions rise, or the demand backdrop improve.” ANZ expects both Saudi Arabia and Russia to extend their voluntary output cuts through 2024.