When the war in Ukraine broke out, the price of a barrel of WTI crude oil rose to nearly $130. This was the highest level since 2008. Since then, the price of oil, along with concerns about a global economic slowdown and monetary tightening, seemed to have fallen steadily. As a result, OPEC may have to take steps to counteract price declines.
By how much has the price of oil fallen?
Since the aforementioned peak, which took place in March 2022, the price of oil has fallen by more than 40 percent, counting to the September low at $76. By September, in turn, the oil price had fallen for four months in a row. Before that, such a series was last seen in early 2020, before the pandemic hit the financial markets. It seems that OPEC countries, which can still recover from the pandemic, cannot afford such a rapid drop in the price of their key export product.
Source: Conotoxia MT5, XTIUSD, D1
What can OPEC do?
WTI crude oil futures were hovering near $86 per barrel as of 07:51 GMT+3 on Wednesday, having risen nearly 9 percent in the previous two sessions. Investors are preparing for an OPEC+ meeting, where a major production cut is expected to be announced to support oil prices. The cartel is scheduled to meet today 05.10.22 in Vienna. For the first time since the pandemic, it will not be a virtual meeting. Saudi Arabia and Russia are preparing deep cuts in oil production, the Financial Times reported Tuesday, citing people familiar with the talks. According to the report, the size of the cuts has not yet been determined, but both Moscow and Riyadh are advocating a reduction of 1 to 2 million barrels per day or more. Such a move would most likely trigger the adoption of countermeasures by the U.S., including an additional release of oil from the country's Strategic Petroleum Reserve, BBN reported. This would be the largest production cut by OPEC since the pandemic.
Estimates of oil production and consumption levels
According to EIA projections, total world oil production in 2022 is expected to be 100.9 million barrels per day (b/d). Of this, 34.11 million is expected to come from OPEC countries. This could mean an increase in OPEC's share of world production from 33.08 percent to 34.08 percent. Oil consumption, in turn, is expected to total 99.53 million b/d in 2022, which could mean an oversupply of more than 500,000 b/d. For 2023. EIA forecasts that the oil market could experience a shortage of 220,000 b/d. Global demand could rise to 101.50 million, while production could reach 101.28 million b/d.
Today's OPEC decision may show that levels below $80 per barrel are not welcome. It could also be related to oil prices, at which the cartel countries' budgets are balanced. For Saudi Arabia, this is estimated at $79 per barrel. Thus, a drop in prices below this level could cause budget problems.
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Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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