OPEC+ to gradually increase production amid market volatility
OPEC+ members said Mar. 3 that they would proceed with the plan to gradually unwind voluntary production cuts of 2.2 million b/d starting Apr. 1. However, the group emphasized flexibility, stating that the increase could be paused or reversed depending on market conditions. This adaptability is aimed at ensuring continued support for oil market stability.
Downward pressure, increased volatility
Oil prices face additional downward pressure due to US tariffs on imports from Canada, Mexico, and China, as well as Canada and Beijing’s retaliatory tariffs.
US tariffs of 25% on imports from Canada and Mexico took effect Mar. 4, with 10% tariffs on Canadian energy, while tariffs on imports of Chinese goods were increased to 20% from 10%.
Beijing announced it would impose additional tariffs of 10-15% on various US agricultural imports, including chicken, pork, soy, and beef, starting next week, according to China's finance ministry.
Meanwhile, Canadian Prime Minister Justin Trudeau stated that Ottawa would immediately implement 25% tariffs on over $20 billion worth of US imports, with tariffs on an additional $86 billion worth of products set to take effect in 21 days.
The OPEC+ decision to move forward with production increases has added new volatility to the crude market. As traders reevaluate supply dynamics, demand forecasts, and geopolitical factors, prices have fallen. Brent crude traded at a 5-month low, slipping below $70/bbl at the time of writing.
“US tariffs on Canadian and Mexican imports, including energy products, could further dampen economic activity and reduce fuel demand, exerting additional downward pressure on oil prices. Reduced demand from these key markets coupled with global economic uncertainty could weigh on the outlook for crude,” said Joseph Dahrieh, managing principal at Tickmill.
"While the market had anticipated a more cautious approach from OPEC+, the confirmation of increased output has led to a swift repricing of risk, with crude benchmarks experiencing a sharp selloff,” said Sobhan Ghanavati, head of client services at Novion.
Hedging strategies
However, rather than triggering broad-based risk aversion, this pullback has created buying opportunities for many market participants, said Ghanavati.
“With crude oil prices falling, there is a heightened focus on hedging strategies as companies seek to safeguard against further uncertainty: producers are looking to lock in forward sales to mitigate potential downside risks should supply increases outpace demand growth; refiners and industrial buyers are taking advantage of lower crude prices to hedge future input costs, ensuring price stability for their operations; physical and paper traders are positioning for a potential price rebound, leveraging structured products to manage directional exposure."
