Column: Doing nothing may be best path for OPEC+ to tame volatile crude oil: Russell

4 minute read

A sticker reads crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, U.S. November 22, 2019. Picture taken November 22, 2019. REUTERS/Angus Mordant/File Photo

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LAUNCESTON, Australia, Nov 29 (Reuters) - Probably the most sensible thing to happen in recent days in the crude oil market is the decision by OPEC and its allies to postpone technical meetings to later this week to give themselves time to assess the market.

Crude's wild ride continued in early Asian trade on Monday, with benchmark Brent futures rising as much as 4.6% to $76.04 a barrel, recouping some of the 11.6% slump on Nov. 26, which saw the contract give up $9.50 to settle at $72.72.

The plunge in oil prices on Nov. 26 was the largest since April 2020, when countries around the world were locking down their economies amid the initial wave of the COVID-19 pandemic.

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A new variant of the virus, designated Omicron, was the bogeyman behind the plummeting prices at the end of last week.

However, given there is still much to learn about the new variant in terms of its transmission and ability to get past vaccines, the slump in crude prices was probably overblown and impacted by technical traders selling as pre-determined levels were breached.

In effect, the market priced in the worst possible outcome from the new variant, but it's still far from clear how it will play out.

The key question is whether the Omicron strain will turn out to be severe enough to once again send countries into lockdown, thereby leading to severe demand destruction for crude.

Some analysts have calculated that the price decline on Nov. 26 equates to the expected loss of demand of about 4 million barrels per day (bpd).

If global crude demand were to drop by the much in December and January, it would mean that countries would have taken severe measures to isolate from the rest of the world.

While this is still a possibility, it's also likely that political leaders are becoming increasingly sensitive to lockdown fatigue among their populations, and the negative economic impact of any new, widespread restrictions.


With all the uncertainty, the decision by the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, to delay a joint technical meeting to Dec. 1 from Monday is prudent. read more

It's not only the potential impact of the Omicron variant that needs to assessed, the group has to also work through the decision by several leading crude importers to coordinate a release of strategic reserves in a bid to lower prices.

Whether the Omicron picture will be any clearer by Dec. 1 is uncertain, but the OPEC+ joint ministerial meeting is still scheduled to take place the next day on Dec. 2.

At stake is whether OPEC+ should delay or amend its current plan to produce 400,000 bpd more per month for five months from August to December.

A broader question should be where is the sweet spot for oil prices currently?

Clearly consuming nations such as the United States and China are of the view that Brent's recent rise to a three-year high of $86.70 a barrel on Oct. 25 is too high for the still fragile state of the global economy.

OPEC+ members may have cheered, or been misled, by several investment banks predicting prices to rise above $100 a barrel in coming months.

However, it also seems clear that the producing nations don't want to see prices below $70 a barrel, which implies the sweet spot is somewhere around an anchor point of $75.

What neither producers or consumers want is the sort of volatility witnessed on Nov. 26.

If the aim is price stability around $75 a barrel, OPEC+ may be best served by not doing very much at all this week.

In times of uncertainty, sometimes the best action is to take no action.

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Editing by Himani Sarkar

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