Oil oscillates as OPEC considers deeper output cuts

Expectations of lower inflation helped drag down the USD, increasing investor appetite for commodities. Energy gained, while industrial metals struggled with headwinds from China.

Crude oil was up sharply in early trade amid reports that OPEC would reduce its output quotas. Saudi Arabia is said to be asking members about this in a bid to shore up global markets. However, some members are said to be resisting the move. Last week’s scheduled meeting was postponed, as the Saudis sought more time to sure up support. OPEC is set to confer online this Thursday to ratify any new agreement. This comes against an uncertain backdrop. Demand is robust, but supply growth from non-OPEC sources has been strong. Geopolitical tensions are hanging over the market. Saudi Arabia may be comforted that US gasoline prices have fallen for 60 straight days. This may soften the US opposition to any move to tighten oil markets and support prices. Crude oil gave back some of the gains late in the session, as traders wait for the outcome of the OPEC+ meeting.

European gas fell as the continent remains awash with gas. Strong renewable energy output and mild weather have muted demand in Spain. This has left local prices depressed. North Asian gas prices followed the European benchmark lower. Prospects of increasing supply also weighed on sentiment. The Prelude LNG plant in Australia is preparing to restart following recent unplanned maintenance. Longer term, demand remains strong. Indian Oil said its planning to double the capacity of the Ennore LNG terminal.

Industrial metals struggled after weak economic data from China. Profits at China’s industrial companies rose only 2.7% y/y in October, much lower than expected. The pace of growth was significantly lower than September’s gain of 11.9%. The subsequent risk of deflation hurt sentiment across the base metals complex. Losses in aluminium were limited amid concerns of supply disruptions in China. Smelters in the southern province of Yunnan are planning to reduce output again this winter as hydropower supply wanes in the dry season. Production cuts across four smelters could be as high as 40% in coming days, according to Shanghai Metal Markets. Supply issues are also impacting copper. Panama’s port protest is restricting supply from the Cobre Panamá mine.

Iron ore extended recent falls as Beijing warned about increased market supervision as it seeks to curb prices. The National Development and Reform Commission said it had met with major port operators to discuss iron ore inventory and storage matters, amid reports of hoarding. Nevertheless, traders remain convinced that China’s CNY1trn debt issuance announced last month will provide more housing and lift steel demand.

Gold climbed to a six-month high as a weaker USD boosted investor demand. Support also came from lower bond yields.