Oil Down on Signs of OPEC+ Discord

(Bloomberg) -- Oil dropped below $45 a barrel as a consensus within OPEC+ to postpone an output hike planned for January remained elusive ahead of a meeting of the cartel’s power brokers later on Monday.

Futures in New York declined 1.8%. Most participants in an informal discussion of OPEC+ ministers on Sunday supported keeping production curbs at current levels into the first quarter, said one delegate, although there was opposition from the United Arab Emirates and Kazakhstan.

The Trump administration, meanwhile, is poised to add four Chinese companies including China National Offshore Oil Corp. to a list of firms blocked from American investment due to military ties, Reuters reported. Worsening relations between the world’s two largest economies may threaten energy demand.

Oil is still set for the biggest monthly gain since May as Covid-19 vaccine breakthroughs raised optimism for a long-term rebound in fuel consumption. Unless the existing OPEC+ agreement is revised this week, however, producers will restart about 1.9 million barrels a day of halted output, potentially pushing the global market back into surplus.

While a majority of OPEC-watchers are expecting a three-month delay to the planned output increase, a recent price rally may complicate talks. Some producers such as Iraq -- which is seeking an upfront payment for its crude -- are facing a cash squeeze and are keen to pump more.

“The argument that might be going on within OPEC centers around the big improvement in the demand outlook for 2021,” said Michael McCarthy, chief market strategist at CMC Markets. “The expectation is that Asian demand will lead the way and drive the improvement in the market, particularly with Europe and the U.S. potentially facing further Covid containment measures.”

Vaccine optimism is also having an impact on oil’s forward curve. Brent’s prompt timespread flipped into backwardation at the start of last week -- a sign that concerns about over-supply have eased -- although it moved back into contango on Friday. It was 10 cents in contango on Monday.

“With the strong rally we have seen in the flat price and timespreads more recently, I am sure some members would question: why roll over cuts?” said Warren Patterson, head of commodities strategy at ING Group. “If Brent were still trading closer to $40, I think there would be less hesitation, as it would be pretty clear that OPEC+ needs to do more.”

China is continuing its robust rebound from the virus-induced crash. An official gauge of manufacturing activity rose faster that expected in November, while at least one fuel supplier is gearing up for an expected surge in air travel ahead of the Lunar New Year holiday in February. Saudi Aramco, meanwhile, may increase the official selling price of its crude to Asian customers for January amid rising physical demand, according to a Bloomberg survey.

The blacklisting of explorer CNOOC comes as the Trump administration plans several new hard-line moves against Beijing in the final weeks of its term. The company’s operations in the South China Sea have run into controversy because China claims drilling rights in waters far from its borders.

The Middle East, meanwhile, is once again seeing rising tension. An oil refinery in Iraq’s north was hit by a rocket, causing a fire, according to al-Arabiya television. That comes after Iran accused Israel and the U.S. of being behind the assassination of one of its top nuclear scientists Friday, vowing revenge.

© 2020 Bloomberg L.P.