OPEC+ taking charge of the oil market

Huge day for the oil markets. OPEC+ have been talking up prospects of production cuts at today’s meeting. Maybe a small cut, maybe a million, maybe two million barrels per day. There’s clearly concern that oil prices are too low for the cartel’s liking.

The jawboning has worked so far. Brent Oil prices are up by 7% on the week already:

Trading above the 20 day moving average but right into a previous key support. Could this area flip and become resistance?

Although the rumoured cuts sound high, a 1 million bpd quota cut wouldn’t change much in reality. OPEC+ members are already significantly under producing (by approximately 3.6 million bpd in August) so a cut to quotas is a very different prospect to a cut from current production levels.

There could be additional voluntary cuts mentioned too. Now, it’s clear that OPEC+ prefer higher oil prices and the $80-$100 range has become the key range. The Saudi Arabian Energy Minister Prince Abdulaziz bin Salman showed signs of discomfort with the oil price back in August (as prices fell below $100), while the White House has indicated their intentions to refill the Strategic Petroleum Reserve (SPR) when futures prices drop to around $80.

The timing of talk over cuts is intriguing too. Aramco, the world’s biggest oil company, said that global oil producers' spare capacity is running low, and as soon as China’s economy reopens fully, there’ll be no margin for error.

“The world should be worried. This is where we are heading. If China opens up a little bit you will find out that spare capacity will be eroded completely.”

As soon as the meeting is over, the focus could switch to China’s big congress meeting on the 16th of October and the potential end to their zero-Covid policy. As China’s economy regains momentum, oil and fuel consumption is likely to increase.

The Biden administration is apparently trying to convince their Middle East allies not to cut production. Higher oil prices could feed into sentiment in the run up to November’s mid-terms, and there are also fears that higher prices would spur a renewed wave of global inflation that would take even higher interest rates to contain, leading to the prospect of a deeper recession.

The US is even talking about banning fuel exports to keep domestic prices down, a decision that industry experts say could backfire spectacularly. There’s also speculation that the entire furore is posturing from both sides, as OPEC+ pushes back against the idea of a price cap on Russian oil.

There’s no reason to speculate that this is support for Russia, more a rejection of the idea that oil prices can be capped by anyone, let alone a buyers cartel.

If oil prices do spike significantly the US could draw on the Strategic Petroleum Reserve once again, but this would leave reserve levels uncomfortably low, so it’s not the simple solution that it has been over recent months.

The potential for more geopolitical friction on the back of the OPEC+ decision is enormous.