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Oil Plunges to January Lows on Report of OPEC Increasing Output

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(Bloomberg) — Oil extended declines as Saudi Arabia and other OPEC countries were reported to be discussing an output increase alongside China tightening its anti-Covid curbs, hurting the outlook for demand.

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Global benchmark Brent fell below $85 a barrel for the first time since September on Monday. Prices slumped on news that OPEC+ is considering an output increase of 500,000 barrels ahead of the EU’s embargo of Russian oil, the Wall Street Journal reported. If confirmed, the production increase would come as market sentiment has shifted, with the price of physical barrels dropping and the US prompt-spread in contango.

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

Crude has erased the gains made at the start of the quarter, when the Organization of Petroleum Exporting Countries and allies including Russia agreed to reduce production by 2 million barrels a day. A looming European Union ban on Russian seaborne flows 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.

“New mobility restrictions in China along with high Russian crude exports” are pushing prices lower, said Giovanni Staunovo, commodity analyst at UBS Group AG. OPEC production cuts and solid demand in the US ahead of the Thanksgiving holiday may help temper the price drop, he said.

The market’s weakness is reflected in rapidly softening differentials. Brent’s prompt spread — the gap between its two nearest contracts — was 30 cents a barrel in backwardation, down from more than $2 a barrel a month ago. The same gauge for West Texas Intermediate has flipped into contango, a bearish signal that indicates ample near-term supply.

Elements, Bloomberg’s daily energy and commodities newsletter, is now available. Sign up here.

–With assistance from Ilena Peng.

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