Oil surged after OPEC+ said it was considering cutting its production limit by as much as 2 million barrels a day, double what was previously anticipated.

West Texas Intermediate closed at a three-week high Tuesday after posting the biggest advance since July on Monday. OPEC’s decision could result in the cartel’s largest output reduction since the deep cuts at the outset of the pandemic, but the actual impact on global oil supply could be significantly smaller because several members already are pumping far below their quotas.

“The potential cut increasing from 1 million barrels a day to 2 million barrels implies a more aggressive approach,” said Stacey Morris, head of energy research at Alerian VettaFi. “It may signal greater concern around demand and the health of the global economy.”

The OPEC+ meeting will force the group to decide whether supply is currently too generous given concerns about global oil demand, Vitol Group Chief Executive Officer Russell Hardy said at the Energy Intelligence Forum in London. The demand side of the oil market is clearly a concern at the moment.

Oil slumped 25 per cent last quarter as central banks including the Federal Reserve raised rates aggressively to combat runaway inflation. The shift to tighter monetary policy spurred speculation of a sharp slowdown in global growth, hurting demand for commodities that were also hit by a surging dollar, though some of that strength cooled on Tuesday. Vitol’s Hardy says he expects crude to trade at US$85 next year, while Gunvor Group and Trafigura Group see potential for US$100.

Meanwhile, Saudi Aramco’s chief executive officer warned Tuesday that the global oil market’s spare capacity is extremely low. And G-7 countries will announce a price cap on Russian oil “substantially before Dec. 5,” the date when European Union sanctions will take effect, according to a U.S. Treasury official. Though the cap is designed to keep Russian oil flowing, Moscow has threatened to withhold crude supply from any country that commits to an upper price limit.

In recent days, the market’s structure has firmed for the main oil futures contracts, indicating a more robust environment for crude and refined fuels. WTI’s nearest timespread closed at its strongest since early August, while the same gauge for European diesel touched its firmest level since July.

Prices:

• WTI for November delivery rose US$2.89 to settle at US$86.52 a barrel.
• Brent for December settlement gained US$2.94 at US$91.80 a barrel.

The OPEC+ gathering in Vienna will be the group’s first in-person meeting since the pandemic forced the group online. In addition, ministers plan to hold a press conference after their session, the first such briefing since last year.

Many OPEC+ nations are unable to meet their production quotas in full given supply constraints. Cutting daily output by 1 million barrels would only lower real-world production by 500,000 to 600,000 barrels, Citigroup analysts said in a quarterly commodity outlook.