Brent oil prices have been declining for some time, and they’ve only lately reached a low of $70. The primary reason for the move was the worry that the financial crisis that began when the SVB bank collapsed would cause a large chain reaction that would significantly slow down the global economy. The blow to SVB did result in further liquidity and confidence crises in the banking system, and we saw the demise of a major Swiss bank, Credit Suisse, which was purchased by UBS. Yet, for the time being, the financial crisis seems to have subsided, and traders are less apprehensive about the drama continuing.
Notwithstanding this, the OPEC+ cartel announced a 1.16 million-barrel per day reduction in oil production over the weekend. The voluntary reduction will begin in May 2023 and continue until the end of the current year. As part of the agreement, Russia would reduce its oil output by 500,000 barrels per day, while Saudi Arabia will reduce its production by the same amount. The UAE will drop output by 144,000 barrels per day, while Kuwait, Oman, Iraq, Kazakhstan, and Algeria will all reduce output.
Oil Price Chart
The move by the cartel is another strong sign and a reminder to the bears who wanted to drive oil prices even lower that they need to change their strategy because oil-producing countries want oil prices to stay close to $100 per barrel. The Saudis and other OPEC members have stated numerous times that they will not allow another chaos in oil prices like the one we saw during the COVID period. This implies that they will continue to actively manage the demand and supply equations for oil prices.
This has given many opportunistic traders faith that oil prices would rise over £100 per barrel and that the path of least resistance will continue to be skewed upward. Today, this confidence has driven oil industry equities higher, while airline stocks have been negatively affected by increasing oil prices and are trading down.
An essential consideration for speculators is that increased oil prices disrupt the whole inflation-controlling system that central banks are attempting to implement. Global central banks have aggressively raised interest rates to combat inflation, which has a detrimental impact on economic development. Nonetheless, OPEC+ has aggressively commented on the link between oil production and the likelihood of slower economic development, as well as the threat of recession, by stating that they would not tolerate a further decrease in prices.
Traders must also consider the US’s relationship with Saudi Arabia, the top oil producer among OPEC members. The US thinks that cutting back on oil supplies hurts global growth and helps Russia’s economy.President Biden was quite disappointed in October when OPEC+ members declared a two million barrel per day decrease in oil supplies. The move by Saudi Arabia was an early indication that they are no longer going to listen to the US.
The relationship recently reached a new low when Saudi Arabia extended a hand of friendship to Iran. Bascially, the relationship has now deteriorated with both Saudi Arabia and Russia.
Final Thoughts
Oil prices, in my view, are likely to retest the price levels around $100 per barrel, but as the dust settles, the price is expected to relax down to the early $80 or late $70 handles. Oil countries will continue to beat the drums of more oil supply cutbacks if oil prices fall below $70, and they may even take action, but oil prices are unlikely to trade and will remain over $100 per barrel until another Black Swan event occurs.
