By Barani Krishnan
Investing.com -- The dollar isn’t in a freefall as oil bulls thought it would be.
And some in OPEC+ seem to be questioning the logic of doing a large production cut to restore the market’s upside if Russia keeps selling crude at huge discounts to fill its coffers and to fight Ukraine.
Those factors, as well as Hurricane Ian’s miss of the oil production platforms in the U.S. Gulf Coast of Mexico, short-circuited oil’s comeback rally on Thursday, driving prices down after a two-day run-up that still left the market sharply down for the month and quarter.
With just a day to the close of September, New York-traded West Texas Intermediate finished Thursday’s session down 92 cents, or 1.1%, at $81.23 per barrel. If WTI stays at around these levels, then the U.S. crude benchmark would finish the month down 9% and the third quarter off by 23%.
Brent, the London-traded global benchmark for oil, settled at $88.49, down 83 cents, or 0.9%. Brent was also about 9% down on the month and some 23% lower on the quarter.
Crude prices rebounded about 7% over the past two sessions on production shut-ins in the Gulf Coast related to fears of hurricane damage. Friendly U.S. inventory data on energy and a weaker dollar had also worked as catalysts for crude’s comeback after a largely miserable September for oil bulls.
The Dollar Index, however, paused its headlong tumble on Thursday, sliding just 0.2% after a 1.3% plunge the previous day, which marked its sharpest one-day loss in three months. A weaker dollar lowers commodity transaction and acquisition costs for users of the euro and other currencies, thereby boosting demand for lower material. A stronger dollar created the opposite effect.
On the storm front, some 9% of the U.S. Gulf Coast’s shut-in production is expected to be reopened with the safe passage of Hurricane Ian away from critical energy facilities in the area.
While crude prices were still supported to an extent by speculation of a production cut to be announced by OPEC+ next week, worries about sanctions-impacted Russia seemed to be weighing on the minds of at least some within the alliance, said analysts.
“If there’s going to be production cut, we can almost bet that Russia wouldn’t be contributing to it, even if there’s a quota assigned to it on paper,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.
Leading OPEC+ members have begun discussions about an oil output cut at their Oct. 5 meeting, three sources told Reuters on Thursday. One said a cut was "likely," while two other OPEC+ sources said discussions were on.
Russia is also likely to propose that OPEC+ reduces output by around 1 million barrels per day, a source familiar with the Russian viewpoint said Tuesday.
“Yes, the Russians will propose such a cut, but they will keep selling crude at a discount in the open market and that will undercut the rest of the exporters in OPEC+ because all Vladimir Putin cares about is filling his coffers and fighting his war with Ukraine,” Kilduff said.
“If OPEC+ announces a substantial cut next week, any futures’ price gain over time will be diluted by Russia’s discounting on the physical market. Anyone in OPEC+ who cuts will also likely lose their market share to Russia. This is OPEC+’s new problem: How to diplomatically move forward with this ally-turned-liability called Russia?”