OPEC gives the market a surprise
The big news today and yesterday was OPEC+ cutting production. These cuts were all voluntary cuts, meaning there was no resolution for cuts from an OPEC meeting. This was just countries following Saudi Arabia’s lead. Here’s the final breakdown:
Saudi Arabia - 500k
Iraq - 211k
UAE - 144k
Kuwait - 128k
Kazakhstan - 78k
Oman - 40k
Algeria - 48k
In addition, Russia cut production by 500k barrels. That puts the total production cut to 1,649k barrels. I’ve see a few bad takes on this.
Typically when OPEC cuts it is due to over supply in the market. What happens is we see economic weakness, there becomes too much oil sloshing around and the price is driven down. Then OPEC cuts production shocking the market price of oil lower. This time, its different. It is different because this supply cut wasn’t necessarily because OPEC sees a recession coming. It’s because they are mad. From the Financial Times:
First Saudi Arabia improved relations with Iran. Then they partnered with China on increasing refining capabilities. Now they are cutting production. All of this looks to me like they are very unhappy with this current arrangement with the US administration. Biden promised to buy oil, he has gone back on that promise.
The OPEC production cut shot the oil market up and with it, almost every oil & gas stock. There has been a distinct line in the sand when it comes to oil. We’ve been trading in a range since December 2022.
If oil trading breaks out of the recent range, this will seed the next leg higher in inflation and allow Jay Powell to continue to raise interest rates. This really puts the Biden administration in a bind. Maybe Yellen will be able to create some economic magic…
