Crude oil rallies 4% as OPEC+ weighs huge output cut to support prices

Both Brent and WTI oil contracts gained 4% on Monday morning to $89/b and $83/b respectively as the OPEC group and its allies led by Russia, a group known as the OPEC+ alliance, are considering cutting crude oil output by as much as 1 million barrels per day to support the falling oil prices driven by the weakening petroleum demand.

The OPEC+ alliance is considering the biggest production cut since the start of the COVID-19 pandemic of 0.5 million to 1 million bpd ahead of Wednesday’s meeting in Vienna, Austria, its first in-person meeting since March 2020, triggering a 4% rally in oil prices across the board.

The production cut would be OPEC+’s second consecutive monthly cut after it reduced output by 100,000 bpd in early September due to deteriorating economic conditions in the global market that have been damaging the fuel demand growth.

Brent crude, Daily chart

Crude oil contracts ended Q3, 2022 with steep losses of around 25% as investors turned bearish on the prospects of the “black gold”, with the prices of Brent and WTI retreating from mid-June’s highs of $125/b to as low as $83/b and $76/b respectively at the end of September, despite the energy crisis in Europe.

The “zero-Covid” measures in top energy consumer China to curb the fresh outbreaks, the soaring U.S dollar, and the recession fears due to the aggressive interest rate hikes by Federal Reserve and other major central banks, have added a “dark cloud” over the demand growth outlook of the petroleum products.

The DXY-U.S. dollar index climbed to its highest in two decades at 114,70 last week, making the dollar-denominating crude oil more expensive for buyers with foreign currencies.

Usually, the dollar and oil prices have an inverse correlation, with a cheaper dollar bolstering oil demand and supporting prices and the opposite.