Crude oil steady as market contemplates OPEC's next move

Commodities inched higher amid a broader improvement in risk appetite across markets. A weaker USD also boosted investment appetite.

Crude oil pared earlier losses after reports that OPEC is expecting a tighter oil market in coming months. Preliminary figures being evaluated by its Joint Technical Committee suggest world oil inventories will decline by an average 1.1mb/d in Q4. This comes ahead of its monthly meeting, where it will discuss whether to provide more oil to the tight market. However, there are still risks to demand. A surge in new cases of COVID-19 threatens to slow the recovery in oil demand. China remains committed to stamping out COVID-19 outbreaks as quickly as it can. And with Beijing hosting the Winter Olympics in February 2022, its unlikely to deviate from its zero-COVID strategy for now. Mobility restrictions are already having an impact, with apparent oil demand only 1.2% in September. This should be enough to see the OPEC+ maintain a cautious approach to supply normalisation. At next week’s meeting, we expect the group to confirm a 400kb/d increase for December.

Coal prices continued to retreat amid signs of improving supply and government policies. The Indian government said that supply of coal to thermal power plants has been rising consistently. China’s Shanxi province, its leading coal producing region, has boosted production. The first three quarters of the year saw output rise 11.6% y/y to 880m tonnes. However, prices pared most of the earlier losses following speculation that Chinese Premier Li Keqiang had voiced concern that the recent plunge in prices was overdone. Zhengzhou’s benchmark coal future was down as much as 10% before ending the session down 4% to CNY1205/t.

European gas prices extended recent losses after Russia promised more gas for the continent. Earlier this week President Putin ordered Gazprom to start increasing its storage in the region. Russia is also worried the excessively high prices could destroy demand, and would like to see them fall by about 60%, according to a Bloomberg report. Higher Norwegian gas flows and the drop in Chinese coal prices also put downward pressure on prices. This also weighed on the North Asia LNG market, with JKM December future falling 5.6% to USD32.010/MMBtu. Easing concerns of a harsh winter also weighed on prices. China’s National Climate Centre reduced its concern that a La Nina event would lead to a colder than normal winter, saying that mild weather is still possible.

Expectations of better gas supply saw European carbon prices fall further during Thursday’s session. News of more Russia gas saw European Union Allowance drop sharply at opening then struggle to recover those losses, with the December contract closing down 2.3% to EUR58.5/t. Australian carbon credits jumped another 4.4% to a new record high in Thursday trade, as a lack of available spot supply continued to underpin the recent bull run. Spot ACCUs hit AUD33.50/t, with tight supply matched by increased buying following news of a net-zero emissions target.

The speculation that Chinese Premier Li Keqiang is concerned about the recent plunge in prices saw base metals swing wildly. Aluminium bounced 2.3%, which lifted the metal sector. A weaker USD boosted investor appetite, after the US posted its weakest growth of the pandemic recovery on supply woes and a surge in COVID-19 cases.

Gold was steady, as concerns about the world’s economic recovery offset the prospect of tighter monetary policy. Ongoing supply bottlenecks are raising inflation expectations, which could see central banks look to policy tightening.