The timing of the OPEC+ decision to cut oil production back by 2 million barrels a day (beginning November) is going to have widespread ramifications.
As you might already know, the price of crude oil affects more than just gasoline. Pain at the pump, so to speak, gives everyday people an immediate jolt to the realities of inflationary pressure. But crude oil is a critical part of the production process, whether it’s a component of certain products, used to power the machines to produce products or fuels the transportation means to deliver products.
In short, oil prices are always factored into the cost of production. And amid the inflationary pressures that most economies across the globe are experiencing, the OPEC+ cutbacks are likely to exacerbate the rise in prices.
Why is OPEC+ Cutting Back Oil Production?
According to Saudi Arabia’s oil minister, the OPEC+ producers are proactively adjusting supply to brace for the likelihood of a global economic slowdown. That makes a lot of sense if you consider what happened during the COVID-19 lockdowns. Crude oil demand (and prices) plummeted drastically.
However, a global recession might not have the same effect on energy demand as a full-scale global lockdown. Demand may decrease in a slower economy, but the need for energy and gasoline may still be relatively “inelastic” (meaning, you still have to drive from home to work and back).
Who Might Benefit From the Cutbacks?
Russia is likely to benefit the most from higher oil prices, as it needs energy revenue to continue funding its war in Ukraine. Bear in mind that OPEC+ controls around 50% of the global oil supply. And within the group, Saudi Arabia and Russia are the top two oil exporters in the world.
As for other potential beneficiaries, hedge funds may be re-entering the oil market, according to Reuters. This means that going “long” oil might (and that’s a big “might”) be an interesting position to consider.
But there are caveats that can disrupt this long-oil bias. If you’re trading the crude oil market, here’s what to keep an eye on from a fundamental and geopolitical standpoint:
- Impact of President Biden’s “consequences”: The US may cease to provide military aid to Saudi Arabia or pursue “antitrust” legislation against OPEC+. Will this have an impact, especially if Saudi Arabia decides, instead, to ally with the BRICS countries?
- How much might a global slowdown ease energy demand? If the US were to face another 1970s-style stagflationary slump, then will the slowdown significantly affect demand for gasoline and other petroleum products? If the recession were to happen on a global scale, how much more of an impact might that have on prices?
Still, It’s All About Supply and Demand
It’s a basic principle: if demand is greater than supply, prices will rise. A cutback in oil production can be significant across the globe. The US imports up to 9% of its crude oil from the east. But other countries import more. Crude oil is a global economy, so any price change due to demand in one part of the world will invariably affect the price of our imports.
If you are wondering whether the OPEC+ cutbacks will increase inflation, the answer is yes. And as you know, a country’s monetary policy cannot do much to influence prices stemming from international factors.
Crude Oil (CL) – Weekly – June 14, 2021 to October 17, 2022
Currently, CL is forming a downward flag pattern which is traditionally viewed as bullish. Look for a breakout above 93.60. Support is at 76.25. If the price of crude oil were to resume its up trend, it would have to clear resistance at 93.60 while avoiding a close below 76.25. The OPEC+ production cuts are set to begin this November.
Things to Look Out For
Earlier this month, Biden announced that he will release 15M Biden’s Barrels of Oil from the US Strategic Petroleum Reserve in December. Is this going to make a significant difference? Nobody’s certain as to what long-term effect this release may have. Political critics argue that it’s more a political gesture than a sustainable one (considering that midterm elections are taking place in November). It may ease the pain at the pump temporarily, but chances are good that it’s not a long-term fix to our budding energy crisis.
The Bottom Line
Watch the price action closely and be sure to pay attention to the economic and geopolitical factors that may all serve as variants in this commodity’s outcome. Things are looking bullish for CL. But its price is vulnerable to being swayed by the larger environment surrounding it.
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