Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Commodity Strategy
Summary: OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event. This following a report from the Wall Street Journal that some OPEC members are considering exempting Russia from its oil-production deal, thereby paving the way for others, especially Saudi Arabia and the UAE, to pump more
Crude oil dropped sharply on Tuesday after the WSJ reported some OPEC members are considering exempting Russia from its oil-production deal, thereby paving the way for others, especially Saudi Arabia and the UAE, to pump more. The 23-nation alliance led by Saudi Arabia is due to finish restoring production halted by the pandemic by the end of September. During the past six months, and especially accelerated following Putin’s attack on Ukraine, the group has increasingly been struggling to deliver the agreed increases, with other producers struggling due to lack of investments, weather problems and rising production costs.
Considering the deal is about to end soon, Saudi Arabia and other producers with available spare capacity may opt to increase production sooner than expected in order to dampen record fuel prices and with that the risk of demand being negatively impacted. Oil producers have historically been better at controlling rising prices by raising production than supporting falling prices by the painful process of cutting production at a time when lower prices drive down revenues, the latter being a situation Saudi Arabia and most other producers would like to avoid.
The coming months are likely to be particularly challenging with EU’s import ban on seaborne Russian crude, as well as the UK and EU agreing a co-ordinated ban on insuring ships carrying Russing oil, the prospect for a revival in Chinese demand, the summer driving season and increased demand towards cooling.
Even if the deal is being put on hold, we believe the negative price impact could be limited as the market want to see whether Saudi Arabia, UAE and a few others have the spare capacity needed to boost production. So, while it may be high on signal value, the actual impact in terms of additional barrels reaching the market may not be enough to prevent prices from staying elevated. OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event.
Brent briefly had a look above $120 per barrel this week, a level we highlighted as a potential ceiling in our Q2 outlook. Whether the price will stay below very much depends on OPEC’s ability to soothe a market focusing on tight supply and robust demand. Short-term the market will focus on the resistance-turned-support level at $114.80/b.
Note: EIA’s weekly stock report has been delayed until Thursday with the API reporting tonight, also a day later than usual due to Monday’s Memorial holiday.
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/en-gb/legal/disclaimer/saxo-disclaimer)