Oil firms on bets OPEC+ will talk up output cuts to stem sinking prices

© Reuters. FILE PHOTO: An aerial view shows tugboats helping a crude oil tanker to berth at an oil terminal, off Waidiao Island in Zhoushan, Zhejiang province, China July 18, 2022. cnsphoto via REUTERS

By Sonali Paul

MELBOURNE (Reuters) - Oil prices climbed on Friday on bets that OPEC+ will discuss output cuts at a meeting on Sept. 5, but the benchmarks were still on track to post their worst weekly drop in four on fears COVID-19 curbs in China and weak global growth will hit demand.

Brent crude futures rose $1.20, or 1.3%, to $93.56 a barrel at 0117 GMT, while U.S. West Texas Intermediate (WTI) crude futures jumped $1.16, or 1.3%, to $87.77 a barrel.

Both benchmark contracts slid 3% in the previous session to two-week lows. Brent was headed for a weekly drop of nearly 8%, and WTI was on track to fall about 6% for the week.

The Organization of the Petroleum Exporting Countries and allies, together called OPEC+, are due to meet on Sept. 5 against a backdrop of sliding prices and falling demand, even as top producer Saudi Arabia says supply remains tight.

ANZ commodities analyst Daniel Hynes said it might be a bridge too far for OPEC+ to agree to cut output but that top producer Saudi Arabia will likely highlight what it sees as a disconnect between current prices and tight supply fundamentals.

"They will certainly try to talk up the market as much as possible to better reflect what they see as a tight market, which is exposed to further supply side issues," he said.

OPEC+ this week slashed its demand outlook, now forecasting demand to lag supply by 400,000 barrels per day (bpd) in 2022, but it expects a market deficit of 300,000 bpd in its base case for 2023.

"As Brent prices fall towards $90/bbl the probability of a supply response from OPEC+ at Monday’s meeting or in October increases," said National Australia Bank (OTC:NABZY) commodities analyst Baden Moore.

"We expect any reduction in supply from OPEC+ to have a material impact on oil prices given the very low inventory levels globally, limited capacity of supply alternatives and ongoing energy crunch in Europe," Moore said.

In the near term, investors are worried about the impact of the latest COVID-19 curbs in China, where the city of Chengdu on Thursday was the latest to order a lockdown that has hit manufacturers like Volvo.

That came the same day data showed Chinese factory activity in August contracted for the first time in three months amid weakening demand, while power shortages and COVID-19 outbreaks disrupted production.