Weekly Brief: OPEC+ Isn’t Going To Let Oil Prices Slip

Weekly Brief: OPEC+ Isn’t Going To Let Oil Prices Slip

over 1 year ago3 mins

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Oil prices have started to slip from their stratospheric peaks, but OPEC+ is determined to keep them from hitting the floor.

🕰 Recap

  • The US has been urging Middle Eastern oil producers and their allies to boost supply and tackle rising gasoline prices since the summer
  • But reports over the weekend suggested that OPEC+ – the group of the world’s biggest oil-producing countries – are considering a hefty cut instead
  • That became official on Wednesday: OPEC+ announced plans to reduce oil supply by two million barrels a day – twice the rumored amount

✍️ Connecting The Dots

After an intense spike following Russia’s invasion of Ukraine, oil prices have slumped on the back of mounting fears of a demand-denting global recession. And since lower oil prices are the exact opposite of what OPEC+ wants, the group announced on Wednesday that it’ll reduce output by two million barrels a day starting from November – that’s about 2% of global supply. The Saudi energy minister made it clear that those cuts will stand firm until the end of next year – unless the market changes, that is.

That’s already made an impact: the price of Brent crude – a key oil benchmark – reached $94 a barrel after OPEC+’s announcement, up from $84 a barrel last week. Some analysts now expect prices to surpass $100 a barrel by Christmas, especially if stricter western sanctions on Russian oil exports squeeze supply even tighter. Still, OPEC+ maintains that it’s doing a good deed: with a potential recession on the horizon, the group says it wants to avert a price plunge like the one that took place in the second half of 2008, when Brent collapsed to below $40 a barrel during the financial crisis.

The US isn’t buying it. The country thinks OPEC+ is selfishly trying to fluff up its members’ economies by keeping oil prices hauntingly high, and even accused the group of aligning itself with Russia. America’s direct response was to announce that it’ll release another 10 million barrels of oil from its own national Strategic Petroleum Reserve in November. That, and the US president – seemingly a man of action and well-timed wit – said he’ll start working with Congress on legislation to reduce the cartel’s control over energy prices called – and we’re not kidding here – “NOPEC”.

🥡 Takeaways

1. The actual drop in supply will be roughly half what’s advertised.

The announced cut is bad, but not as bad as the headline figure suggests. See, the reduction of two million barrels a day will be measured against the same plumped-up production baseline from previous OPEC+ agreements. That outdated yardstick means that actual oil supply will only fall by about one million barrels a day – half the headline figure. That’s because several member countries – struck by challenges spanning from long-term underinvestment to international sanctions – are already pumping well below their quota levels.

2. But the cut could still give the world’s economy a shock.

Thing is, losing one million barrels a day still marks the biggest cut since 2020, and that’ll only send energy prices higher ahead of the peak winter season. Layer on the fact that the stronger dollar is making payments even pricier for the many countries that have to buy their oil and natural gas in the US currency, and OPEC+’s move really ups the risk of inflation staying higher for longer all over the globe. That would, in turn, push the world’s central banks to keep at their aggressive interest rate hikes, and choke economic growth as a result.

🎯 Also On Our Radar

Research analysts are turning bullish on Tesla’s stock. They’re putting its recent delivery issues out of mind, and focusing more on its swelling sales and the recent extension of a $7,500 tax credit for EV buyers in the US – Tesla’s biggest market. In fact, Bloomberg data showed 27 of 49 research analysts – about 55% – who follow Tesla recommend buying the stock, while 12 of the rest have hold ratings. That’s big: we haven’t seen such a high percentage of analysts rating Tesla as a buy since early 2015.

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