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Brent and Crude oil prices are giving up their gains after OPEC+ announced a production cut of 100,000 b/d in October. The initial announcement brought bulls back into the market and that pushed oil prices higher yesterday. Now, traders are wondering about the path of the least resistance for oil prices.
OPEC+, an organization that decides about oil production, announced its first oil supply reduction in more than a year and confirmed its commitment to proactively manage global crude markets. Saudi Energy Minister Prince Abdulaziz bin Salman said, “this decision is an expression of will that we will use all of the tools in our kit.” He added, “the simple tweak shows that we will be attentive, preemptive, and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry.”
We saw oil prices rise yesterday on the back of OPEC+’s decision because the announcement surprised traders who had been expecting the oil production to remain steady, but there had indeed been some speculation that OPEC may cut production. Prince Abdulaziz has been dropping hints about an impending policy shift. He warned two weeks ago that the lack of liquidity was causing futures prices to be overly erratic and unrelated to the fundamentals of supply and demand. To achieve balance again, a decrease in production may be the most effective strategy.
However, not many were expecting a reaction from the cartel yesterday. The reality is that oil prices above $90 harm consumers already struggling with soaring inflation. The slowdown in economic activity is adversely influencing oil demand, and OPEC+ doesn’t want to see another episode of oil prices plunging as they did during the covid peak.
The reason that we are experiencing a decline in oil prices now is that the cut that OPEC+ announced wasn’t actually a natural production cut. The cartel is running 2.8 million barrels per day behind its production quota schedule. They increased the production by 100,000 b/d in September, and in October, it will be back where it was before. So, if you look at the overall picture, there hasn’t been any cut apart from the fact that the increase in production will not continue, and OPEC+ is still way behind its original quota number.
The other reason for oil prices giving up their yesterday’s gains is that we do not see much enthusiasm among oil traders. This is due to the fact that China, the largest oil importer, has displayed once again signs of dramatic economic slowdown as consumption sank 9.7% last month, which is a new low in two years.
A further source of potential supply growth for OPEC+ is Iran, which is still in talks to resurrect a nuclear deal and lift U.S. sanctions on its petroleum shipments. The International Energy Agency estimates that a successful deal could add more than 1 million barrels per day to global markets, but more effort is needed to get there.
To conclude, despite some active management of oil supply from OPEC+, traders are worried about oil demand as a slowdown in global economic activity continues to create a significant threat to higher oil prices.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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