Whether you are trading oil or USD, OPEC’s latest announcement will cause more volatility for both in the coming weeks. But there’s a larger issue in progress that all traders and investors should know about. A change is coming that will affect the whole world, and anyone with a trading account will be able to take advantage of the coming chaos. In this article, we will explore OPEC, BRICS, and war, so get comfortable, this might be the most important article you’ll read this year.
What is OPEC?
Let’s cover the basics first. The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization, the original 13 members being Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. These countries constitute the largest oil producers in the world, and if a country is not on good terms with them, oil supply needs might not be easily met.
Then came OPEC+, an extended alliance of crude producers who have been undertaking corrections in supply in the oil markets since 2017. The OPEC+ countries that joined are Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
The unification of the countries seemed fairly harmless at the time, but an agenda is now surfacing, and that agenda will have a massive effect on the oil market, and it will also hit the US economy and USD in ways hard to imagine. Here’s why.
The end of the petrodollar
After World War II, USD became the mediating currency for the majority of countries doing business together. Every nation bought USD and used it for trading commodities, especially oil. Using the petrodollar means that the US economy has a huge effect on international supply and demand transactions, but that seems to be coming to an end. Recently, OPEC has been at odds with the United States, accusing America of using its shale oil production to "weaponize" oil prices and to weaken OPEC's influence on the global oil market.
Second to China, the United States is a massive oil importer, spending $138 billion (USD) every year. So it makes sense that America would wish to reduce that cost and also lessen its reliance on other countries. But those other countries have a different perspective. America’s bullying of smaller nations with threats of sanctions prompted the BRICS nations to get more proactive recently, and America doesn’t like what’s happening.
Founded in 2001, the BRICS countries are Brazil, Russia, India, China, and more recently South Africa. BRICS has launched several initiatives such as the BRICS New Development Bank and the BRICS Contingent Reserve Arrangement. In simple terms, BRICS has created an alternative to USD or the petrodollar.
It’s becoming more and more clear that the BRICS nations are looking to limit how much the United States can influence their economy, and who can blame them. When the housing market in the US crashed in 2008, it sent the whole world into a recession, and it looks like America’s crumbling economy is doing it again.
But dumping the petrodollar is provoking the most powerful military in the world. America has a history of invading a country when its oil supplies are threatened, and smaller countries are always concerned about US military intervention in their region. BRICS was formed to ensure those member nations would not face invasion alone.
Is another war brewing?
Needless to say, BRICS represents a major threat to US dominance in global finance, and the BRICS countries have become increasingly influential in global affairs in the last 12 months. And this all comes after China recently hosted a BRICS meeting where Chinese President Xi Jinping, in a virtual summit, called for an expansion of BRICS with 5 more countries on the invitation list. Add to that, China was the guiding force that tabled the idea of replacing the petrodollar in the first place.
Moreover, China’s economy is recovering and even booming. America’s prominent position as a global financial leader is in jeopardy, and that raises concerns as to how America will react to that threat. Many will remember the cold war between Russia and America, and it seems like the US is positioning itself for another major conflict.
US Chairman of the Joint Chiefs of Staff Mark Milley was quoted as saying, “The People’s Republic of China remains our number one long-term geostrategic security challenge.” The intentions are clear and hard to misinterpret. Some major news sites have already speculated on the possibility of America declaring war on China. In an article by Time magazine, James Stavridis, a retired four-star admiral and former NATO supreme allied commander, argued that a war between the two countries is "not inevitable, but it is certainly possible."
That’s an overly cautious statement given that US Secretary of Defense Lloyd Austin recently told a House subcommittee that the latest record-breaking military budget request was directed primarily at China. Other experts have also expressed concerns about the growing tensions between the two countries. In a recent article in The New York Times, Graham Allison, a professor at Harvard University, argued that the United States and China are "locked in a Thucydides Trap," a term used to describe the tendency for rising powers to come into conflict with established powers. He warned that "the risk of war between the United States and China is real and growing."
And with 60% of active-duty US forces now at the highest readiness, ready to deploy to combat in less than 30 days, it seems like a new battlefield is ready to burn and only needs a spark. Clearly, current hard times are provoking new conflicts, and the global markets are going to react with epic volatility, especially if America goes to war.
What traders can expect from oil and USD
On Sunday, OPEC announced that it would be cutting production by 2 million barrels per day (BPD). This decision was made in response to concerns about the global economic slowdown and the rise of shale oil production in the United States. The alignment between OPEC and BRICS is significant because it could lead to a weakening of the US dollar. The adoption of an alternative to the petrodollar means many countries will no longer need USD. If such massive amounts of USD are repatriated, USD value will sink to lows the world has never seen. America simply doesn’t have sufficient commodities to buy back all the dollars it has been printing, which means America will be forced to default. US inflation will go through the roof, and the US economy will collapse. The only leverage the US has to prevent this is its massive military. Hence the war signals.
As for oil, the recent OPEC production cuts will likely provoke a rise in the price of crude. But if political friction from the US goes to the next level, we may see OPEC countries introducing sanctions and embargos against the US. It’s happened before. In 1973, multiple Arab states (now members of OPEC+) executed a surprise attack on Israel. The United States aided Israel, while the Soviet Union took the side of Egypt. Shortly after, the Organization of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo against America, which included a 25% decrease in the production of oil, throwing the United States and several other countries into an energy crisis.
The cost of oil in the United States and many countries skyrocketed. The United States began emergency rationing of oil consumption, limiting the amount of petrol that could be dispensed at fueling stations.
If the US provokes OPEC and BRICS, it’s not hard to imagine a repeat of such sanctions and embargos. The rest of the world would still have oil, and the 2 million BPD cut would balance the supply and demand since the US would not be receiving oil. That would likely be a deadly blow to the United States, which is already experiencing high inflation, horrific interest rates, and internal discord. Such a combination of events could end the reign of the United States and put their society into disarray. Of course, non of this is confirmed — yet. Only historians will be able to make such connections with absolute certainty, but speculators are already connecting the dots, and smart investors are preparing to take advantage of the coming chaos.
To summarise
OPEC cut production by 2 million BPD, which means oil prices are going to rise. The US faces the possibility of USD devaluation as the petrodollar is abandoned. China and the US are going head to head for economic domination, which may result in war, and the countries with all the oil are favoring China.
We live in interesting times, that’s for sure. If such a systemic change in global finance begins this year, there will be people who profit from the chaos and people who struggle. If you don’t yet have an Exness trading account active and funded, now might be a good time to get one.
As these political issues unfold and get wider coverage, you’ll be able to better evaluate the price of oil and the strength of USD and trade accordingly. And while smaller US banks will see a run as the US economy continues to decline, your funds will be safe with Exness and the tier-1 banks of Europe. The Exness blog will continue to monitor the situation, and post insights relevant to traders, so be sure to add us to your browser favorites and visit us regularly.
