Macro Intelligence: Oil prices rise as OPEC+ cuts supply
This edition of MI delves into the intricate dynamics of OPEC+, the rationale behind its latest production cut, and its potential repercussions. Get a closer look at the key players, the stakes, and the future of energy markets.
Artile written by Kyle Rodda, Ausbiz
OPEC+ cut oil output over the weekend in a bid to stabilise prices.
In this week’s Macro Intelligence, we explain what OPEC+ is, discuss why it reduced production, dissect how it could impact markets and the global economy, and analyse the charts of three energy-sensitive assets.
What is OPEC+?
OPEC stands for the Organisation of Petroleum Export Countries. It’s a cartel of major oil-producing countries that coordinate the production and direct the price of oil.
OPEC was formed in 1960 as a way for commodity-exporting countries to gain greater sovereignty over natural resources. Headquartered in Vienna, the modern cartel contains 13 members, spread across North Africa, the Middle East, and South America. The group accounts for 40 percent of total oil output and controls over 80% of the world’s oil reserves.
Saudi Arabia is the organization’s biggest producer and boasts the lowest marginal cost of production, making it the most influential member. Other top producers include Iras and the United Arabe Emirates.
In recent years, OPEC has become colloquially known as “OPEC+” to signify the participation of other major oil-producing nations in decisions about output. This includes significant energy exporter Russia, the world’s third-largest producer.
While sometimes devolving into price wars, such as in April 2020 when futures prices fell below $0 per barrel, the OPEC+ arrangement has proven an effective mechanism to stabilise energy markets. It has also curbed the United States' influence in global energy markets as the world’s biggest producer, a title it earned following the 2010’s shale boom.
Why did OPEC+ cut production?
After tense negotiations, OPEC+ announced that it would be cutting oil production by a further 1 million barrels per day, and the cuts that it had previously agreed to in May would be extended until 2024.
The decision comes amid weakening energy demand and a subsequent slide in oil prices amid a slowdown in global economic activity. In particular, manufacturing activity has declined significantly in the US and Europe, with the re-opening of China’s economy early in 2023 not enough to offset this weakness.
The weakness in oil prices has come despite his historically moderate production levels and lower global supply. Output has fallen consistently in 2023, and supplies have moved sideways after a peak in 2022 that barely reached pre-pandemic levels.
OPEC+ and the Saudi’s actions, in particular, underscore the tight market conditions the cartel is attempting to engineer in order to backstop prices.
How will production cuts impact the markets?
The initial response from the market was to buy oil, as traders discounted a greater reduction in supply. However, the move proved short-lived. Crude rallied by as much as 4% in early Asian trade on Monday before closing only a fraction higher.
Following some softer-than-expected US economic data, the price of Brent drifted back to where it was prior to speculation of an OPEC+. The signal from the market is that despite a hawkish OPEC+, production cuts will be insufficient to keep upward pressure on prices, with the demand outlook of far greater concern.
The modest move in prices would be welcomed by economic policymakers globally. Energy prices are a major contributor to inflation, which remains elevated despite aggressive rate hikes from global central banks. The downtrend in prices potentially points to higher rates' impact on economic activity.
Three markets to watch
Brent Crude prices remain range-bound. In the bigger picture, key support is around $70.00, while key resistance is around $87.00. $70.00 is likely to be a strong level of support, with OPEC+ unlikely to let prices slip far below that level. The United States may also replenish its strategic reserves below that price.
Brent Crude daily chart
ASX Energy Index
The Australian energy index is range bound with momentum moving sideways. Short-term support appears around 10,500 and resistance is around 11,000.
ASX Energy Index daily chart
Woodside Energy shares are in a primary downtrend. Sellers have emerged above $35, a break that could open a run toward $36.70. Meanwhile, the first level of support looks to be in the low $32 mark; strong buying has appeared at $30.
Woodside Energy daily chart
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