Market Minute: More Oil Supply on the Horizon? Wait for the OPEC+ Meeting
After a 9% rebound from recent lows, crude oil has reversed its gains over the past two sessions as the market prepares for the upcoming OPEC+ meeting. Traders are speculating that higher-than-expected production increases may be on the table. A recent Wall Street Journal article suggested that Saudi Arabia is considering boosting production and potentially "ditching" its $100 price target for oil. However, it's important to approach this headline with caution. In the lead-up to OPEC meetings, member countries or their representatives often use the media to influence policy discussions.
This scenario played out just over a month ago, when rumors swirled about production increases, only for OPEC+ to maintain its existing timeline for output adjustments. Several member states, including Iraq and Kazakhstan, have been overproducing relative to their quotas and are seeking to make cuts to align with previously agreed-upon levels. So far, there has been no confirmation of such cuts, and if they don't materialize, OPEC+ may decide to extend production increases into the future.
But what if the report is accurate and production increases are coming by the end of the year? The oil market is already under pressure, with profitability squeezed by the 3:2:1 crack spread, a metric that tracks the profitability of converting three barrels of crude into two barrels of gasoline and one barrel of diesel or heating oil. Depressed crack spreads have been impacting domestic producers, and any meaningful increase in supply could further weaken prices and erode margins.
On the upside, the recent wave of mergers in the Permian Basin could help companies adjust to the changing market. Lower margins might drive these companies to right-size their operations and better align with the new market environment.
For now, it’s best to hold off on making any judgments until after the OPEC+ meeting. As we’ve seen before, things can change quickly in the world of oil production.
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