OPEC's latest Monthly Oil Market Report (MOMR) shows crude oil production reduced by 49,000 barrels per day (BPD). That put the output down to an average of 28.8 million BPD in January, and this is part of a 156,000 BPD reduction by Saudi Arabia. How will the markets react? Everybody has a quick answer to that question.
Oil supply & demand
Anyone trading oil will tell you - whenever production is cut, the supply & demand dynamic changes and crude prices go up. And not long after, commuters everywhere feel a pinch at the pump. Is it about to happen again in 2023? In 2017, OPEC and non-OPEC members extended cuts in oil output to the tune of 1.8 million BPD. Supplies dwindled, and nations paid excessive prices throughout 2017. The whole world knew it was coming. Demand was high, and oil prices rocketed from June’s $42 (USD) up to $66. OPEC’s mission to inflate prices succeeded.
Fast forward to 2020. Crude prices crash to 1999 prices in Q1. Dropping from $63 per barrel down to a shocking $14.00, OPEC’s stakeholders demanded action. OPEC cut overall crude oil production by a massive 9.7 million BPD between May and June of 2020. The reasoning was said to be an attempt to reduce the global oversupply with hopes of firming up depressed oil prices. What followed was epic.
April 2020. The production cuts catapulted crude prices into a 2-year rally, rising to an extortionate $110 per barrel in May of 2022. The massive production cut not only improved OPEC’s revenue, it spiked to a ten-year high. The new prices provoked governments everywhere, and political pressure followed. It’s 2023, and here we go again… or not. All the main media channels made the oil cut announcement, as though it was a major move by OPEC. But there’s nothing major about it, and traders should be cautious.
The Oil hike hype
When the news was first released that OPEC would cut production, thousands of traders and financial journalists jumped on the story… likely with the expectation of bullish times ahead.
Saudi Arabia’s energy and industry oil minister, Khalid Al-Falih said, “We considered various scenarios, from six (months) to nine to 12 and we even considered options for a higher cut... All indications are solid that a nine-month extension is the optimum and should bring us within the five-year average by the end of the year.”
Five-year average! The 13 member countries have a near total monopoly on oil prices, and the world always needs more. OPEC has the ability to set the price at almost any level by pinching the supply chain, but there are limits that could provoke intervention or invasion, so OPEC usually tries to be reasonable. OPEC's charter is to keep oil prices at a 5-year average… the current price stabilization agreement. But the average for the last 5 years is $67 per barrel. At the time of writing, crude is at $78 per barrel. Above the average. Hardly a justification for a new production cut. But is it really a production cut, or just a modification blown out of all proportions?
Media hype doesn’t match the math
Every major financial media outlet is on oil right now. Big brand news sites are even throwing around the number “$100 per barrel” in the coming months. That might be a powerful motivator to get investors and traders to buy in. But before you do, consider the numbers again. A 1.8 million barrel cut added $24 to the price of crude. A 9.7 million barrel cut added $93 to the price of crude.
So for every 75,000 - 100,000 BPD cut, the price of crude increased by $1. Now consider that the latest cut was only 49,000 BPD, with a target cut of 156,000 BPD. Mathematically, such a supply cut should have very little impact on today’s volatile prices, if any at all.
And don’t forget Nigeria and Angola have increased production by 112,000 BPD, softening the supply flow shortage considerably.
Conclusion
When it comes to trading, don’t always believe the hype, no matter how legitimate the sources are. All this media hype will affect market sentiment and pump the price, but without any real fuel behind the rally, it will likely be short-lived. Oil prices are pushed and pulled by so many sources of influence. From the economy to politics, and corporate profit, there’s a lot to follow, so stay updated with the coming fundamentals before you consider trading oil.
