Oil prices slide but trade near seven-year high amid Opec+ supply plan

Bullish forecasts for crude as tensions rise over Ukraine crisis and US inventories decline

The Opec+ group, led by Saudi Arabia and Russia, opted to add 400,000 barrels of oil per day to the market in March. Reuters

Oil prices slid on Thursday but continued to trade at elevated levels, a day after the Opec+ group of countries agreed to add 400,000 barrels of crude to the market in March amid higher demand.

Brent, the global benchmark for two thirds of the world's oil, was down 0.39 per cent to $89.12 per barrel at 12pm UAE time on Thursday, while West Texas Intermediate, the gauge that tracks US crude, was trading 0.49 per cent lower at $87.83 per barrel.

Oil prices have rallied more than 10 per cent this year and Brent touched a seven-year high of $91.70 per barrel last week. Crude has risen more than 67 per cent in the past year.

“With Opec+ returning production at a gradual pace, there looks to be no short-term risk to oil prices falling as actually delivering the additional barrels may prove a challenge for the producers’ alliance,” Emirates NBD said in a note.

A number of smaller producers within the group have struggled to raise production because of underinvestment in the oil sector and “a faster pace of supply additions would erode the already narrow buffer of spare capacity within Opec+, held mainly by a few producers in the Gulf region."

Crude has stayed buoyant in the past few weeks as geopolitical tensions continue to rise in Eastern Europe. On Wednesday, the US approved the deployment of 3,000 troops to Eastern Europe, in addition to the 8,500 troops it placed on high alert after Russia stationed thousands of military personnel along the border with Ukraine.

Russia, one of the world’s top oil producers, further boosted its troop presence over the weekend in a sign of a potential escalation that could derail the flow of global energy supplies.

The strain on spare capacity would become “more apparent should supply elsewhere be interrupted for a prolonged period," Emirates NBD said.

Edward Moya, senior market analyst at Oanda, said Opec+ stuck to a gradual production strategy despite pressure from the Biden administration to boost output to cool down prices.

“Opec+ will save larger-than-expected production promises for when oil is over $100 a barrel,” he said.

Ipek Ozkardeskaya, senior analyst at Swissquote, also expects crude to hit $100 per barrel.

Depleting oil inventories in the US, the world’s largest economy, is also supporting prices. US oil inventories declined by a million barrels for the week ending January 28 from the previous week, according to a new report from the Energy Information Administration.

“The simultaneous blend of depleting inventories, thinning spare capacity and structural underinvestments is leading us to turn even more bullish on oil, and have revised our forecasts upwards, with our models pointing for Brent to average $96 per barrel in 2022 and $112 per barrel in 2023,” Ehsan Khoman, head of emerging markets research at MUFG Bank, told The National.

The total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-coronavirus levels to $341 billion in 2021 amid green transition efforts, the International Energy Forum said last year.