As mentioned in my previous oil update a couple of weeks ago that “the OPEC might have to cut even more production to prevent prices from falling significantly further,” that’s precisely what they did at the weekend, creating a big gap in oil prices. Oil prices eased off their highs slightly, but not by much. At the time of writing, there were approaching the overnight highs again. Where does oil go from here?
Breakaway gap
While gaps typically fill, they don’t always. This could be a breakaway gap in oil prices. The impact of the production cuts could send WTI to at least $85-$90 from here, before we potentially see some real weakness in oil prices again. Any short-term weakness in oil prices could prove to be bear traps, and thus may well be bought.
In case you didn’t read the news, the OPEC+ blindsided the market with a surprise production cut, announced at the weekend. The group agreed to cut nearly 1.7 million barrels of oil per day. The reductions are pledged from next month through year end. Saudi Arabia is again leading the way with 500,000 barrels per day of cuts. Several other Gulf states have joined in with their curbs. Russia, who had already announced a 500k bpd through June, has now extended that through year end.
The OPEC+ decision comes totally unexpected. Given that nearly 1.7 million barrels of oil per day will be held back from global supply, this should keep prices supported. In the short-term we well see some further significant gains in WTI, before the focus turns to weaker demand outlook.
What about the longer-term outlook?
While the OPEC+ cuts are expected to tighten the oil market and may well provide further support to prices in the near-term, the longer-term outlook remains uncertain. After all, a side effect will be a fresh inflationary jolt to the world economy. This in turn may mean even more rate increases than was priced in last week.
Ultimately, a high oil price will hurt demand at a time when household and business finances are overstretched. The thing about oil demand, though, is that it is very price inelastic. So, unless something like Covid happens again, don’t expect to see a material drop in oil prices due to demand weakness. People will not stop driving or travelling by plane because of high oil prices.
Therefore, demand is only likely to get hurt moderately by rising oil prices.
Indeed, oil is a supply-driven market.
Thus, the only way for oil prices to come under significant pressure again is if non-OPEC supply increases sharply. This is possible but will take some time for producers outside the OPEC+ to ramp up their production.
So, the big risk is that this could start another supply war between the OPEC+ and non-OPEC countries such as the US and Canada.
Breakaway gap
While gaps typically fill, they don’t always. This could be a breakaway gap in oil prices. The impact of the production cuts could send WTI to at least $85-$90 from here, before we potentially see some real weakness in oil prices again. Any short-term weakness in oil prices could prove to be bear traps, and thus may well be bought.
In case you didn’t read the news, the OPEC+ blindsided the market with a surprise production cut, announced at the weekend. The group agreed to cut nearly 1.7 million barrels of oil per day. The reductions are pledged from next month through year end. Saudi Arabia is again leading the way with 500,000 barrels per day of cuts. Several other Gulf states have joined in with their curbs. Russia, who had already announced a 500k bpd through June, has now extended that through year end.
The OPEC+ decision comes totally unexpected. Given that nearly 1.7 million barrels of oil per day will be held back from global supply, this should keep prices supported. In the short-term we well see some further significant gains in WTI, before the focus turns to weaker demand outlook.
What about the longer-term outlook?
While the OPEC+ cuts are expected to tighten the oil market and may well provide further support to prices in the near-term, the longer-term outlook remains uncertain. After all, a side effect will be a fresh inflationary jolt to the world economy. This in turn may mean even more rate increases than was priced in last week.
Ultimately, a high oil price will hurt demand at a time when household and business finances are overstretched. The thing about oil demand, though, is that it is very price inelastic. So, unless something like Covid happens again, don’t expect to see a material drop in oil prices due to demand weakness. People will not stop driving or travelling by plane because of high oil prices.
Therefore, demand is only likely to get hurt moderately by rising oil prices.
Indeed, oil is a supply-driven market.
Thus, the only way for oil prices to come under significant pressure again is if non-OPEC supply increases sharply. This is possible but will take some time for producers outside the OPEC+ to ramp up their production.
So, the big risk is that this could start another supply war between the OPEC+ and non-OPEC countries such as the US and Canada.
