OPEC+ hold oil the cards

Oil has reached an interesting and important crossroads. Brent oil has returned to the pre-Ukraine war price. We can slice and dice the price action any number of ways. The oil price has completed the 61.8% fib retracement of the prior swing (from 65.63 to 131.06).

On top of this, it has also recovered above both the 20 and 200 day moving averages and looks to be breaking the recent trend of lower highs….

There are plenty of reasons for technical traders to say this oil chart looks bullish. How about from a fundamental perspective? Saudi Arabia’s energy minister had a warning for the market earlier this week:

“OPEC+ has the commitment, the flexibility, and the means…to deal with such challenges and provide guidance including cutting production at any time and in different forms”

Production cuts at a time when energy markets are in such a state of flux with limited spare capacity could have a serious impact on oil prices. Especially when the current market dynamics are primed for higher volatility. The Saudi minister explained the issues:

“The paper oil market has fallen into a self-perpetuating vicious circle of very thin liquidity and extreme volatility undermining the market’s essential function of efficient price discovery, and have made the cost of hedging and managing risks for physical users prohibitive. This has a negative impact on the smooth and efficient operation of oil markets, energy commodities and other commodities creating new types of risks and insecurities. This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions.”

Now, there are more factors to consider here too. The production quotas for each OPEC+ member compared to their actual output. In July, the so-called compliance hit 546% according to OPEC+ delegates. A measure below 100% means they’re producing more than agreed, and a measure above 100% means they’re producing less than agreed.

So, cuts to production quotas may not make much difference to actual production levels under the circumstances.

The Iran Factor

The headlines this week have been full of rumours about a deal with Iran, potentially removing sanctions on the regime and bringing Iranian oil back into the global market. Nothing is agreed yet, but a deal seems more likely now than it has for a long time.

Again, doubts surround the potential impact of this. See, there are ways around sanctions, and not everyone agrees with them. China has become an important buyer of Iranian barrels since the sanctions were (re)introduced by the Trump administration. So, how much more oil will really hit global markets if a deal is struck?

Also, many of the OPEC members are open to production cuts if Iranian oil returns. So, even if more oil flows out of Iran, there are no guarantees that the total available supply will actually increase.

The OPEC+ meeting on the 5th of September may offer some clarity. The cartel members have already staked their position. They’re not ready to allow prices to fall any time soon.