OPEC+ actions risk driving economies towards stagflation OPEC+ actions risk driving economies towards stagflation OPEC+ actions risk driving economies towards stagflation

OPEC+ actions risk driving economies towards stagflation

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Brent crude oil has reached a fresh ten-month high near $93 while WTI is approaching $90 as OPEC+ production cuts continue to tighten the market thereby raising questions about the group's true intention. Our price outlook needs to reflect the fact that the OPEC+ increasingly looks like being focusing on price optimization instead of a balanced and stable market, and with that in mind, the short-term risk of a Brent move above $95 cannot be ruled out.


Global Market Quick Take: Europe
Commodity Weekly:  Crude production curbs and dollar strength in focus
Commitment of Traders: Crude long jumps on Saudi production cut; Dollar bears on the run


Brent crude oil has reached a fresh ten-month high near $93 while WTI is approaching $90 as OPEC+ production cuts continue to tighten the market thereby raising questions about the group's true intention. Saudi Arabia’s ‘stable and balanced market’ reason for cutting production rings increasingly hallow after OPEC in their monthly report said the market may experience a shortfall of 3.3m b/d in the fourth quarter, potentially driving the biggest deficit in more than a decade. With the EIA meanwhile only predicting a 230 kb/d shortfall, OPEC may find themselves being accused of trying to inflate prices to meet big spending plans among its members

While the IEA, just like the EIA saw a somewhat more moderate but still worrying supply deficit during the fourth quarter, the outlook for crude prices has turned decisively more supportive as it has became increasingly apparent that the main objective of successive OPEC+ production cuts in recent months has been in order to seek higher prices instead of their continued claim that the cuts are in order to keep the market stable and balanced.

Cuts have been led by Saudi Arabia which including its June 1 mb/d “lollipop” has cut its production by around 2 mb/d since last September, and at current export levels the Kingdom would need around $110 per barrel for its revenues to match what they generated before they started cutting production in June. So far this year, according to the IEA, OPEC+ production has fallen by 2 mb/d with overall losses being tempered by sharply higher Iranian flows. Rising prices have supported a production boost from non-OPEC+ suppliers by 1.9 mb/d to a record 50.5 mb/d.

The IEA also highlighted the current tightness is being felt even harder across refined fuel products: “Refinery margins hit an eight-month high in August as refiners struggled to keep up with oil demand growth, especially for middle distillates (diesel and jet fuel). Product cracks and margins reached near-record levels due to unplanned outages, feedstock quality issues, supply chain bottlenecks and low stocks. Sub-optimal crude allocations following embargoes on Russian crude and products and OPEC+ oil supply cuts have kept European and OECD Asian refinery runs well below year-earlier levels”.

Our price outlook needs to reflect the fact that the OPEC+ focus is more about price optimisation than price stability, and with that in mind, the short-term risk of a Brent move above $95 cannot be ruled out. However, while OPEC can control supply, they have limited influence on demand, and with inflationary pressures from higher energy prices on the rise again, the timing of peak rates may suffer another delay while later rate cuts may end up being less than expected. All developments that carry the risk of stagflation, i.e. low growth and stubbornly high inflation.

With OPEC production declining while the estimated production capacity holds steady, the available spare capacity has risen above 6 million barrels per day (Source: Bloomberg). Rising spare capacity and rising crude oil prices rarely go hand in hand that well, but given the current adherence by the major producers to the agreed production limits, the temptation to increase production seems limited at this stage. The high level also reflect the fact that the current tightness is driven by political decisions, not because the world is running out of oil.

In the coming weeks we will be watching several developments that may decide the direction from here:

  • The refinery maintenance season is approaching and during this time demand for crude oil will weaken, but refinery margins and with that the cost of diesel and gasoline may remain elevated as supply is reduced.
  • Will speculators react in a more forceful manner on the buy side, than seen recently where the main activity was focusing on covering short positions, more than adding new long positions, potentially signaling a conflict between a positive technical outlook against a challenging macroeconomic environment
  • How will non-OPEC+ producers, especially in the US, respond to higher prices?
  • An estimated daily flow of 0.4 mb/d from Iraqi Kurdistan to Turkey has been disrupted since April amid a diplomatic and legal dispute between Baghdad and Ankara. A solution will help reduce the current focus on tight supply.
  • A risk of another US rate hike before yearend may increase should fuel prices continue to rise, potentially giving the dollar a boost while hurting the economic outlook

For now, tight market conditions remains on clear display, with gasoline and especially diesel refinery margins remaining elevated, and through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both command a backwardation above 70 cents per barrel, up from close to flat around the time Saudi production cuts were implemented. The outlook for slower demand growth in 2024 as highlighted by all three forecasters has also supported a rise in one-years spread, examples being Brent where the Dec-23 / Dec-24 spread has reached a backwardation of $8.2 per barrel while the WTI equivalent trades as high as $8.7 per barrel.

Brent has been in a bullish uptrend since July with support at $85.50 - potentially being the bottom of a new higher range supported by OPEC’s active management of supply, and resistance at $94. RSI at 75.5 point to the most stretched price condition since March last year, raising the risk of a short-term pull back, but as long the price holds above $89, the upside momentum is likely to be supported.

Source: Saxo

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.