Brent’s recent rebound was based on the notion that the OPEC+ alliance would significantly shorten its oil dispensers in November, perhaps by as much as 2 million bpd, to prop up prices.
What is OPEC+?
OPEC+ is an alliance of 23 major oil producing nations, with Saudi Arabia and Russia seen as de facto leaders.
Their collective job is to determine how much of their oil supplies are sent out into the world, which in turn affects global prices like Brent and US crude.
Econs 101: Supply vs. Demand
Let’s revisit some basic economic data to understand how the upcoming OPEC+ decision will affect oil prices:
- When supply is greater than demand = prices go down
- When demand is greater than supply = prices go up
In the chart above, notice how Brent has fallen since June.
This is due to fears that global oil demand is weakening amid a possible recession.
Lower demand (possible global recession) + higher supply (OPEC+ restores supply; more on that below) = Brent prices fall.
The drop in oil prices has already prompted OPEC+ to step up and act
Earlier this month, the alliance had already imposed a symbolic 100,000 bpd supply reduction for October.
100,000 bpd pales in comparison to the 100,000,000 (100 million) barrels the world consumes per day. That’s only 0.1%
Even with such a symbolic sum, that was an early sign of a turnaround.
- Remember how OPEC+ has been gradual since July 2021 raise Production, or more specifically, restoring production to pre-pandemic levels.
- Today they were able to announce a significant one lowering its performance as of November.
The hope is that:
Increased global demand + reduced supply = prices rise again
(so that OPEC+ members can continue to earn higher revenues from these elevated global oil prices).
Here are 3 potential scenarios for markets to consider in light of the upcoming OPEC+ decision
OPEC+ announces 2 million bpd cut
Such an announcement could lead to a spike in oil prices.
Possible immediate resistance for Brent:
- $93.50 = 50-day simple moving average (SMA)
- $95.11 = previous cycle high
Now it gets tricky because the devil is in the details.
Such a massive headline count must also change this supply-demand equation (as above) for global markets to make sense.
Note that as part of the previous campaign (since mid-2021) to restore production, OPEC+ members were already struggling to meet their respective increased production quotas.
Due to years of underinvestment and even political instability in some OPEC+ members, many countries have not been able to pump out as many barrels of oil as they announced under the previous deal.
Bloomberg estimates the gap between production target and actual production = 3.5 million bpd.
Therefore, even if OPEC+ announces a 2 million bpd cut, this can only be perceived as an empty word and may not be an actual cut in the real world.
It all boils down to how that 2 million bpd would be filtered down to each OPEC+ member’s actual production levels.
OPEC+ announces production cut of 1 million bpd – 1.5 million bpd
Brent prices may just be holding at current levels
OPEC+ announces a production cut that is less than 1 million bpd
Such disappointing news could prompt Brent to pare back its recent gains.
Possible immediate support levels for Brent:
(Previous Cycle Lows)
Overall, OPEC+ needs to strongly demonstrate its desire to bring prices back to market fundamentals to provide meaningful support for oil benchmarks amid the wave of demand-destroying monetary tightening by central banks around the world.
For oil prices to continue to rise, today’s OPEC+ announcement must not only materially impact the global supply-demand equation, but the alliance must also signal its readiness for further production cuts in the future.
For more information visit FXTM.