PREVIEW: OPEC+ could rock oil markets today

October 5, 2022

OPEC+ will be holding an in-person meeting in Vienna today, and is set to announce a major decision that’s likely to reverberate across global oil markets.

Given the forward-looking nature of markets, oil benchmarks have climbed over the past week in anticipation of today’s keenly-awaited meeting.

Brent is now in sentinel mode, hovering above the psychologically-important $90/bbl line at the time of writing, but still remains in the downtrend that’s persisted since June.

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Brent’s recent recovery have been based on the notion that the OPEC+ alliance would significantly tighten its oil taps in November, perhaps by as much as 2 million bpd, in order to shore up prices.

What is OPEC+?

OPEC+ is an alliance of 23 major oil-producing nations, with Saudi Arabia and Russia seen as its de facto leaders.

Their collective job is to determine how much of their oil supplies are sent out into the world, which in turn influences global prices such a Brent and US Crude.

Econs 101: Supply vs. Demand

Let’s revisit some basic Economics in order to understand how OPEC+’s upcoming decision will impact oil prices:

When supply is higher than demand = prices go down
When demand is higher than supply = prices go up

Note in the chart above how Brent has been dropping since June.

This is because of fears that global demand for oil is weakening amid a potential recession.

Lower demand (possible global recession) + Higher supply (OPEC+ restoring supplies; more on this below) = Brent prices falling.

The declines in oil prices have already prompted OPEC+ to sit up and act.

Earlier this month, the alliance had already imposed a symbolic 100k bpd supply reduction for October.

100,000 bpd pales in comparison against the 100,000,000 (100 million) barrels that the world uses per day. That’s just 0.1%

Even with such a token sum, that was already an early sign of a U-turn.

Recall how since July 2021, OPEC+ has been gradually raising output, or more specifically, restoring output back to pre-pandemic levels.
Today, they could announce a sizeable lowering of its output starting in November.

The hope is that:

Elevated global demand + lower supplies = prices move back higher
(so that OPEC+ members can continue earning higher revenue from those elevated global oil prices).

Here are 3 potential scenarios for markets to consider in light of the imminent OPEC+ decision:

OPEC+ announces a 2 million bpd cut

Such an announcement may lead to a knee-jerk spike in oil prices.

Potential immediate resistance for Brent:

$93.50 = 50-day simple moving average (SMA)
$95.11 = previous cycle high

Now this is where it gets tricky, cause the devil is in the details.

Such a massive headline figure also must meaningfully change that supply-demand equation (as above) for global markets.

Note that, under the previous campaign (since mid-2021) to restore output, OPEC+ members had already been struggling to reach their respective ramped-up output quotas.

Due to years of underinvestment and even political instability in some OPEC+ members, many countries couldn’t pump out as many barrels of oil as they said they were going to under the previous agreement.

Bloomberg estimates that gap between the output target vs. the actual output = 3.5 million bpd.

Hence, even if OPEC+ announces a 2 million bpd cut, it may just be perceived as empty words and may not be an actual cut in the real world.

It all boils down to how those 2 million bpd would filter down to each OPEC+ member’s actual output levels.

OPEC+ announces an output cut of 1 million bpd – 1.5 million bpd

Brent prices may just hold around current levels

OPEC+ announces an output cut that’s smaller than 1 million bpd

Such disappointing news may prompt Brent to unwind its recent gains.

Potential immediate support levels for Brent:

(previous cycle lows)

$86.88
$84.77
$82.53

Overall, OPEC+ has to forcefully demonstrate its desire to restore prices to market fundamentals in order to offer meaningful support for oil benchmarks, amid the wave of demand-destroying policy tightening by central banks around the world.

In order for oil prices to continue marching higher, the OPEC+ announcement today has to not just materially influence the global supply-demand equation, but the alliance also has to signal its willingness for more output cuts in the future.

Article by ForexTime