What Does Opec Do Exactly – On April 2, OPEC+ announced an unexpected oil production cut of 1.16 million barrels per day. This followed a sudden cut of around 2 million barrels per day in October 2022. Why is OPEC+ cutting oil production?
Reuters summarizes the main reasons for the recent reduction in OPEC+ oil production: 1) concerns about global demand in the “Western banking crisis”, 2) penalties for speculators selling short-term crude oil futures, 3) the need for stable oil. price increases due to domestic economic needs and 4) the refusal of the Biden administration to replenish strategic reserves.
What Does Opec Do Exactly
In fact, OPEC addressed all of these issues in its latest monthly oil market report – April 2023. The report hinted at a weakening outlook for global economic growth, and it was reflected in a reduction in hedge funds’ net long positions in crude oil futures contracts. The Biden administration’s decision not to complete the SPR. However, one paragraph stands out:
What’s Really Behind Opec’s Sudden Decision To Cut Oil Production?
The effects of monetary tightening are expected to continue in March, following the turmoil in the US banking sector. As the Fed aims to reduce economic growth to control inflation, this will largely depend on its ability to achieve the soft landing expected in these forecasts. This is a known macro event
So the above paragraph basically covers the whole story and is a popular topic in global macro circles.
However, something that is actively debated is the very real possibility of US Dollar (UUP) strength and more specifically Euro (FXE) weakness.
I have done extensive research on crude oil speculation (there is an article at the end) and there is a significant positive correlation between crude oil prices and the euro. Here is the graph:
Opec Production Cut Won’t Shock Or Awe Oil Markets
The graph above shows that crude oil falls sharply as the euro weakens, and rises as the euro strengthens. The collapse of oil prices in 2014 was exactly like the collapse of the euro.
It should be noted that in 2014, before the drop in oil prices, Russia annexed Crimea. Also note that oil prices fell along with the Euro in 2008, followed by the Arab Spring a few years later. Therefore, the drop in oil prices has real geopolitical consequences.
That’s why OPEC+ is very concerned about a stronger US dollar, as it will lead to lower oil prices, but not for fundamental supply/demand reasons. The US dollar is the world’s reserve currency, and an international shortage of the US dollar represents a liquidity shock. The global liquidity crunch has led to a flight of the US dollar and US Treasuries to safe havens and capital outflows from emerging markets, commodities and all risk assets.
Basically, the result of the global movement of funds into safe assets was a financial collapse in commodity producing countries, which led to political instability and chaos – the Arab Spring.
What Is Crude Oil, And Why Is It Important To Investors?
The Fed has the ability to project a strengthening US dollar and a movement of global funds into safer assets by attracting liquidity. How? By raising interest rates above the rate of inflation and reducing the balance sheet or QT.
Thus, the Fed has the indirect power to influence policy in OPEC+ countries, as well as influence the outcome of global wars.
OPEC+ knows this well, so the latest oil production cuts are only a short-term solution – to keep oil prices high for as long as possible in the hope of a soft landing. However, the Fed understands that the strengthening of the dollar is currently necessary to keep inflation at 2%. So don’t expect the Fed to cooperate.
As a long-term solution, Saudi Arabia, including the EU and Brazil, are out of reach of the US dollar-dominated system by the Fed, opening a new source of geopolitical conflict.
Opec Countries, Headquarters, Members, Objectives, Functions
ETFs tracking the energy sector (NYSEARCA: Down 26% from January to October 2022. Even in 2023, the XLE is up 4% YTD.
However, long-term charts confirm that the energy sector is highly cyclical and prone to boom periods. In addition, the energy sector is a lagging indicator and has performed better than in the latter part of the cycle. The largest increases occurred late in the cycle, coinciding with higher oil prices and broader inflation, and declined as the recession developed.
We are currently nearing the end of the late cycle, and if this is at the top of the range, then the energy sector could be a SELL at this point.
Investors interested in XLE’s 3.83% dividend yield can now get higher yields on 2-year Treasury notes.
How Much Oil Each Opec Member And Allied Nations Intend To Cut In 2019
Low energy stock prices hardly reflect long-term growth expectations. XLE’s largest holding is Exxon (XOM) with a weighted 23% PE ratio of 9. This is a value trap.
Markets expect the Fed to pause in March and begin tapering in 2023, with the core CPI still at 5.6% and the unemployment rate at 3.5%.
However, I believe the Fed will continue to raise interest rates well above current expectations, which will push the dollar higher as the market prices in the Fed’s policy. Therefore, the oil price trend may continue to weaken, which will affect the energy sector (XLE), which will also weaken.
The Fed should raise the unemployment rate; if the unemployment rate is below 4%, a new cycle cannot begin. Thus, recession is inevitable. From a geopolitical perspective, a global recession is beneficial for the US in the short term. It’s short-term pain, but long-term gain.
Opec And How To Migate The Influence Of It
Global macro research. Proprietary merchant. Licensed as a Commodity Trading Advisor, Series 3 Licensed as a member of the National Futures Association. Professor of Finance. Editor-in-Chief of “Accounting and Corporate Finance” magazine.
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Explainer: What Is Nopec, The U.s. Bill To Pressure The Opec+ Oil Group?
While other central banks manage the balance between inflation and employment, OPEC is positioning itself as the oil market’s central bank, claiming that its interventions help stabilize supply and prices. But markets are not reliable, and producer groups tend to exacerbate volatility rather than calm prices, causing greater correlation with fundamentals, thereby disrupting the broader macroeconomic balance.
Oil’s recent rally has pushed Brent prices above $95 a barrel and left markets wondering whether OPEC is both a firefighter and a firefighter at the same time. The group of producers is experiencing a shortfall of 3 million barrels per day in the fourth quarter of 2023. Some may question the claim that it is trying to stabilize the market, unless its own figures show it, and its members are keeping oil prices in check. deficit of 3 million barrels per day. cut production. OPEC also claims to have aligned the market with fundamentals, which are still shaky and unable to sustain higher prices. Brent futures spreads have widened from 60¢/bbl to $1/bbl for the next six months, which doesn’t exactly reflect a calm and stable market.
Some forecasters, including Energy Intelligence, are concerned about the disconnect between China’s oil consumption strength and poor macro data on the country’s economy. Even the Saudis admitted that “no decision has been made” on China’s request, which, if stated directly, would sound like a harsh statement. China’s economy remains uncertain in 2024, and the sharp differences in demand estimates – from Energy Intelligence’s 370,000 bpd to OPEC’s 580,000 bpd and the International Energy Agency’s 640,000 bpd – reflect that uncertainty.
Additionally, China does not like oil prices above $80-85/barrel and may decide to create a demand vacuum around OPEC to drive down prices. Beijing has never done this before. Only crude oil imports should be reduced. China could import 600,000 bpd less in the second half, Energy Intelligence predicts. The country could use record high inventories to keep refineries well supplied and refined fuel exports at full speed. China has become a major supplier of petroleum products and almost single-handedly dictates global refining margins. You have a lot of pricing power in your hands
Opec’s Influence On Global Oil Prices
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