Oil extends drop as Opec+ struggles for consensus on output plan

Opec+ talks have been complicated by the price gain. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Oil fell for a third day as Opec+ sought more time to reach a deal on production policy after a meeting broke down without an agreement.

Futures were 0.8 per cent lower in New York on Tuesday (Dec 1). Ministers for the grouping - which includes the Organization of the Petroleum Exporting Countries (Opec), Russia and other allies - will now meet on Thursday rather than Tuesday to allow more time to deliberate on whether to delay a planned increase in output from January. While some see the market as too fragile to absorb additional barrels, others are keen to pump more to take advantage of higher prices following Covid-19 vaccine breakthroughs.

Asia's recovery, meanwhile, gathered pace. Factory activity in some of the region's biggest export-led economies including South Korea and China surged in November. The rebound highlights the uneven global demand picture Opec+ is facing, with Europe and the US grappling with a resurgent outbreak.

Oil has just capped its biggest monthly increase since May on optimism energy demand will rebound as Covid-19 vaccines are rolled out in the coming weeks. Opec+ talks have been complicated by the price gain and cracks have appeared in the alliance, with Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman signaling his dissatisfaction with the situation on Monday by telling others he may resign as co-chair of a committee that oversees the output deal.

There had been some consensus building between ministers around keeping cuts for another three months, but friction has emerged with the United Arab Emirates on quotas, while Kazakhstan wavered on an extension. Opec+ will probably have to make concessions that could be in the form of a shorter extension and then a gradual increase in production, Bob McNally, president of Rapidan Energy Advisors, said in a Bloomberg television interview.

"Opec+ is stuck between a rock and a hard place because near-term indicators show Europe and US demand is weak, but Asia is stronger," said Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia. "Even though it's a sign that the fracture within the group is deep, the fact that they're willing to give two days to sort out disagreements is a positive sign."

Brent's three-month timespread was 23 cents a barrel in contango, compared with 44 cents on Monday. The spread has flipped back into contango - where prompt prices are cheaper than later-dated ones - after moving into backwardation last week amid optimism over vaccine breakthroughs.

Opec+ is likely to agree on a face-saving compromise, with a short extension the probable outcome followed by a phased return of production, according to RBC Capital Markets. However, if cuts are eased, Brent oil prices are at risk of dropping back toward US$40 a barrel and the market faces an oversupply of as much as 2 million barrels a day next quarter, Wood Mackenzie Ltd. said.

Global fuel demand, meanwhile, still remains shaky. Indian diesel sales in November dropped year-on-year after a festive boost in consumption proved fleeting, while a slow Thanksgiving for U.S. gasoline demand is foreshadowing what will likely be a tough season for fuel producers.

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