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OPEC+ insurance cuts to be extended (and possibly deepened)

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

All eyes are laser focused on the 36th OPEC+ ministerial meeting, now rescheduled for 30 November (the delay heightens the drama – not the outcome, in our view). Our base case (70% probability) is for an extension in unilateral Saudi Arabian and Russian voluntary production cuts through to Q2 2024 given Brent oil prices are ~USD7/b lower than when latest extension was announced on 5 September. We envisage (30% probability) for a deeper level of cuts with the rationale being that in today’s underinvested environment, OPEC+ has inelastic pricing power to defend its OPEC+ put of ~USD80/b (especially when demand is seasonably softer in the first quarter off the year). Should deeper cuts transpire, we anticipate them to be more group-wide than unilateral in dimension (given the former tends to raise revenues), with one viable option being a 0.5-1.0m b/d cut through Q2 2024 shared proportionally among the large OPEC+ producers (which cut in April 2023). Whilst theoretically, reducing barrels from global markets is oil price bullish, we believe an extension of OPEC+ insurance (and possibly deeper) cuts, on near-term price outcomes will skew neutral as our baseline forecast for this meeting is consistent with our core OPEC+ output path in our supply balances. 

Energy

Beyond the OPEC+ meeting on 26 November that’s front and centre of global oil markets (see global commodities section above), natural gas markets remain fraught with skittishness. European natural gas (TTF) prices has bullish factors that are driving price gains currently, yet volatility in futures contracts shows that the market is still divided over its outlook with weather forecasts turning colder, alongside potential shipping disruptions due to rising Middle East tensions. 

Base metals

Copper is rallying following the announcement of a potential suspension of mining at the Cobre Panama mine, and a labour strike planned for next week at the Las Bambas mine in Peru. Combined, these represent 3% of global mine supply and 4% of global concentrate supply. The duration of these potential disruptions remains inherently unclear at the current juncture. 

Precious metals

Gold’s back testing above USD2,000/oz and could see some follow-through buying if the level breaks decisively. Bullion has had a swathe of bullish factors working in its favour, from haven demand on geopolitics to lower US rates and a downdraft in the US dollar. Going forward, a so-called golden cross beckons, with gold’s 50-DMA on track to top its 200-DMA in the coming weeks (last time the pattern came around was in mid-January).

Bulk commodities

A rally in iron ore is taking a breather as speculation swirls that China may step up moves to cool a recent advance to a nine month high. The National Development and Reform Commission (NDRC) held a meeting with market players, warning them not to speculate on prices of the steelmaking raw material, according to unconfirmed reports.

Agriculture

Palm oil has jumped above MYR4,000/t – highest in three months – lifted by a stronger demand outlook for cooking oils in China and expectations of a rise in its biofuel use. The tropical oil has also been buoyed by soybean oil, its closest food and fuel substitute, which recouped losses.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.