Oil & the OPEC response
It’s all kicking off in Oil Wars, the 2021 edition!
We covered the background in the week ahead.
Quickly recapping, the US has been ramping up the rhetoric to try and force OPEC+ to increase production faster and drive oil prices down.
The latest tactic of threatening to release reserves from the strategic petroleum reserve (SPR) in cooperation with other nations (China, India, South Korea and Japan) has kept prices falling throughout most of November.
The weekly chart really emphasises this point. Four consecutive weekly losses:
And if we drill down to the daily chart, price is trading back below the 20DMA and under the 76.40-77.50 key support zone.
Nothing in the oil market happens in isolation however.
OPEC Secretary Barkindo said last week:
"The projections, not only from OPEC but from the IEA (International Energy Agency) and other sources, show that throughout the quarters of next year there will be oversupply in the market using the metric of the OECD stocks"
Since then, Coronavirus lockdowns have returned in Europe. Austria is already taking action with a 10 day lockdown & Germany is ‘not ruling anything out’ as they struggle with the latest wave.
China’s Zero-Covid tactics are weighing on mobility there too.
Zooming out, once the release is announced, what happens next?
The alliance is scheduled to meet on December 2nd, and there are already concerns among members that the market will return to surplus in Q1 2022.
Comments on Monday by Joseph McMonigle, (Secretary General of the International Energy Forum) attracted attention:
- “I anticipate OPEC+ energy ministers will maintain their current plan of adding more supplies to the market gradually,”
- “However, certain unforeseen external factors such as a release of strategic reserves or new lock-downs in Europe may prompt a reassessment of market conditions,”
And there wouldn’t need to be much negotiation.
The current deal between OPEC+ members increases production by 400,000bpd each month. Within this deal is a provision for a three-month pause subject to market conditions...
How could this play out?
Even as the US insists there will be no lockdowns this winter, demand could easily be subdued by travel and other restrictions. If the oil price falls, the temptation for OPEC+ to pause production increases becomes stronger.
If the US and other nations have already drawn down their reserves, and then demand returns or isn’t dampened as much as feared, there seems little in the way of higher prices.
Especially if OPEC+ are already on pause with production.
And perhaps there will be a political temptation to hold production steady for just a little longer in the knowledge that the consuming nations have already played their trump card…
Fascinating times in the oil market with so many dynamics in play.
Keep an eye on the 100 & 200 day moving averages below market.
It would be no surprise to see dip buyers step in and ‘give it a go’ around those levels if the market gets down there.
Not investment advice. Past performance does not guarantee or predict future performance.