The OPEC cartel's recent decision to cut oil production was met with a response from U.S. President Joe Biden, who called an emergency conference call on October 31 following the cartel's decision. To this, he announced significant steps to beat the price, describing the oil companies with the following words: "Their profits are a windfall of war – the windfall from the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe"
Situation in the US oil market
Since President Biden's statement, the price of WTI crude oil (XTIUSD) on the markets has risen more than 16% to $92 per barrel. Recall, however, that the United States is currently the number one producer in the oil market. According to the latest data from the EIA (Energy Information Administration), production stands at 11.975 million barrels per day (11.9% of global output). These are levels from November 2019, when the price per barrel was in the neighbourhood of $55. Will Biden succeed in forcing companies to increase production?
On Wednesday, we will learn the results of the change in oil inventories in the United States. Last week, they decreased by 3.115 million barrels (0.45 million barrels per day). If this trend continues, it could be assumed that the US government's actions have yielded the first results. However, the amount of inventories seems to be presented negatively. According to the EIA's data, they currently stand at 836.62 million barrels, down 29% from their July 2020 peak. If the current trend of inventory consumption continues, the stockpile would run out in 5 years; if it doubles, we could see shortages after just 2.5 years.
Will OPEC lead to a global recession?
According to data provided by OPEC, in Q3 2022 global supply was 100.63 million barrels per day, and the cartel itself, which consists of 13 countries mainly in the Middle East, amounted to 29.45 million barrels per day (28% of global output). Demand at the time was 99.33 million barrels per day. It is expected that demand may remain at a similar level. The cartel's announcement may indicate a desire to reduce production by more than 2 million barrels per day. This could create a shortage in the world market of about 2%, in which case it seems that we could expect price increases in this market.
To cover the described shortfall, the Biden government would have to increase production by 16%, or increase supply to levels of about 14 million barrels per week. Both scenarios and their mixes may prove unlikely.
Oil prices, and fuel prices at that, appear to have a significant impact on inflation. As a result, the U.S. presidential government may do all it can to limit the risk of further price increases.
Information that could lead to a reduction in demand in the global market in recent days is a declaration by the Chinese government, which has reaffirmed its commitment to pursuing a zero-Covid policy. This could lead to a reduction in demand from one of the world's largest importers of the commodity.
What does Wall Street think about the oil market?
The EIA Institute gives a target price for 2023 in the vicinity of $95/bbl. However, a consensus of analysts reported by Trading Economics indicates a price of $108.71/bbl in 12 months. An additional perspective was indicated by UBS bank analyst Giovanni Staunovo on OPEC's production cuts: "The cut suggests that there is a desire to defend oil prices to stay above the level of $90 per barrel".
Source: MT5, XTIUSD, Daily
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Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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