10.10.2022 – A few days ago, OPEC and allied countries such as Russia decided to cut production. Immediately, the bullish change of mood in the market intensified. We shed light on the background.
In the midst of the West’s conflict with Russia, Saudi Arabia jumped in to help the Kremlin. A real affront. Starting in November, the Riyadh-dominated cartel of 23 countries will produce two million barrels less oil per day. The aim is to stabilize the oil price, which has fallen sharply recently. In fact, the price – here the daily chart of Brent – picked up some time before the OPEC meeting in Vienna last Wednesday. The most important analysts had apparently been well informed in advance. Goldman Sachs, at any rate, predicted a price of $105 per barrel for Brent – in six months. This mark is already in sight.
While the U.S. may now be producing more oil after all – a turnaround away from the eco-course will take time. However, a global recession is looming and demand is suffering. Also, some countries are already producing less than their allocated quota allows them to. Nigeria, Angola and Russia, for example. This is due on the one hand to Western sanctions against Moscow; on the other hand to the dilapidated infrastructure – in some countries, state funds just keep ending up in the deep pockets of corrupt politicians.
Another question is what effect the Western embargo on crude oil from Russia, which will take effect in December, will have. Perhaps it will have no effect at all – because other countries will simply sell Russian oil on to the West as middlemen. Nevertheless, things could soon change in the market.
Michael Every of Rabobank claims to have observed a tectonic shift in geopolitics. The White House is raving about the Saudis’ decision – they are no longer the swing producer that has always helped the United States. In any case, America’s reaction is not convincing: tapping the Strategic Petroleum Reserve by another ten million barrels will not help for long – and at some point the reserves will be depleted. Once again, plans are whirring around in Congress to finally pass the NOPEC law that has been under discussion since 2007, according to which companies from OPEC countries could be sued for antitrust violations in the United States.
Warning of new supercycle
And Louise Dickson of Rystad Energy predicted a market tightening in December on Bloomberg TV – with a possible new supercycle in prices. One possible White House response is also an export ban on diesel and gasoline to keep prices low at the pump ahead of the midterms. Which in turn should boost the price of Brent in Europe. The lobby group American Petroleum Institute warned that an export ban would amount to a shortfall of 1.3 million barrels of oil per day.
Our conclusion: the cut announcement seems bullish. However, high inflation plus a recession could push demand further down. However, it is quite possible that OPEC+ will cut production even further if the current move does not have a lasting effect. Bernstein Bank is keeping an eye on the situation for you!
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