Oil prices rise on possibility of Opec+ output cuts and Libya conflict

Supply concerns outweigh demand fears amid recessionary fears

Oil pump jacks at the New Harmony Oil Field in Illinois, US. Oil prices have remained extremely volatile in recent weeks. Bloomberg

Oil prices rose on Monday amid the possibility of Saudi Arabia and its allies at Opec+ cutting output to counter market volatility, as well as fears of supply disruptions in Libya, which is facing political conflict.

Brent, the benchmark for two thirds of the world's oil, was trading 3.07 per cent higher at $104.1 a barrel at 9.02pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 3.38 per cent at $96.21 a barrel.

“Oil prices had a decent week [last week], with Brent futures up by 4.4 per cent to $100.99 per barrel and WTI adding 2.5 per cent to $93.06 per barrel,” said Khatija Haque, head of research and chief economist at Emirates NBD.

“While the chorus of hawkish central bankers may dent the economic outlook even more, the comments from Saudi [Arabia’s] oil minister — that the producers’ bloc may seek to limit output at upcoming meetings — are helping to provide a floor in oil.”

Oil prices have remained volatile, dipping in the past few weeks amid investor concern about a looming recession.

US Federal Reserve chairman Jerome Powell's comments on Friday, indicating the continuation of tighter monetary policy to tame inflation, also affected market sentiment.

However, Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview with Bloomberg last week that Opec and its allies, including Russia, had “the commitment … and the means” to deal with volatility in prices and “provide guidance, including cutting production at any time and in different forms”.

The Opec+ super group, comprising 23 producers, agreed to increase output by 648,000 barrels per day in both July and August as it fully unwinds cuts of about 10 million bpd introduced in May 2020 to counter the slump in demand caused by the coronavirus pandemic.

Opec+ agreed earlier this month to raise production by another 100,000 bpd in September amid pressure from major consumers, including the US, to cool prices. The group will meet on September 5 to decide on its future output policy.

Opec+ will soon “start working on a new agreement beyond 2022, which will build on our previous experiences, achievements and successes”, Prince Abdulaziz said.

Kuwait will also continue to support efforts to promote market stability through the alliance, the country's Deputy Prime Minister and Minister of Oil Mohammad Al-Faris has said.

The continuing conflict in Opec member Libya is also supporting oil prices.

The North African country's health ministry said on Saturday that 32 people had been killed and 159 wounded during fighting between rival armed groups in the capital, Tripoli.

The clashes began on Friday night and continued into Saturday, with buildings set on fire and hospitals damaged.

Libya, which has some of the cheapest oil in Northern Africa, has had much of its production disrupted during the civil war that erupted after the downfall of the country's former leader, Muammar Qaddafi, in 2011.

There have been two competing governments since March and the country could return to instability under the rival administrations, the UN warned earlier this year.

"Crude oil kicks off the week on a positive note, as the supply side issues came back in force last week after the Saudi minister said that Opec is unhappy about the falling prices, and could restrict output," said Swissquote Bank senior analyst Ipek Ozkardeskaya.

There is also “no breakthrough in the US-Iran nuclear deal” talks, with the impasse supporting oil prices, she said.

Discussions on the Iran nuclear deal are continuing among the major world powers. Iranian Foreign Ministry spokesman Nasser Kanaani said last week that the country had received a response from the US about the EU's final draft for the revival of the 2015 nuclear deal and “the careful review of the response has started in Tehran”.

If signed, the nuclear deal is expected to add 4 million barrels of Iranian oil per day to the market to ease supply concerns.

In a research note last week, Swiss bank UBS said oil prices could rebound to $125 in the coming months due to tight market supply, declining spare capacity and low oil inventories.