There’s nothing like helping out friends and filling your pockets a little in the process. This is the summary of Sunday’s decision of the cartel of oil exporting countries (with its allies led by Russia, OPEC), whose pulse has not trembled when it came to choosing to surprise to close the crude oil tap . If you add up the -voluntary- decisions of the different countries, you arrive at a cut of 1.6 million barrels per day (assuming they all comply).
The first consequence has been the increase in the quotations, which yesterday reached almost 7% (the most important daily increase of the last year), before calming down at 84 dollars. Several analysts are now predicting a hot summer in the market, with prices that could climb to $100, which could revive inflation.
But why should oil be taken off the market right now, when prices are skyrocketing in Western economies and with the threat of a global economic slowdown, caught between financial turmoil and the bullish rate cycle of interest… and, on top of that, of surprise? The answer to this question is based on two factors. One is economical. Over the past year, Brent oil prices have fallen by more than 20%. A fall that has taken place even after the last official cut, dated October 5, which was double what was announced on Sunday: two million barrels per day.
Therefore – argue the states that export black gold – it is necessary to cut even more, because it is difficult for prices to rise (last summer they were at 130 dollars, and last weekend, at 80). Another preliminary question must be answered: why have prices dropped so much? Because with the new cycle of monetary policy and high inflation, global demand had weakened. “The cartel is now not very concerned about what happens in the West. It is more concentrated in Asia, its main market, where, in addition, inflation is lower. And China, the world’s largest consumer, has started again after the setbacks of covid”, explains Jorge León, vice president of the Rystad Energy consultancy.
The other reason is more geopolitical and unrelated to the current situation. With this cut, OPEC also lends a helping hand to its ally Russia, which is in financial difficulties (over the last year its oil revenues have fallen by 42%), affected by sanctions for the war in Ukraine and forced to sell its oil in Asian markets at discount prices. “Yesterday’s decision to make voluntary cuts demonstrates the solidarity of the cartel with Russia in view of the price limit”, explain in a note the consultants of Esai Energy.
Obviously, in the US the cut has upset them. “It is not something that is recommended given the uncertainty of the market,” said a spokesman for the White House. “It is urgent to stop depending on fossil energies because those who control them play with it”, complained, in turn, the European Commissioner Thierry Breton. Emblematic was the response of the Kremlin spokesman, Dmitri Peskov: “Whether other countries are happy or not is their question.”
However, there is also the possibility that, in the long term, OPEC’s move will end up shooting itself in the foot. “Laretallada is a clear admission of weakness, not strength. The cyclical perspectives point to a moderation of oil demand in the Western world, as well as in China, since the structural backdrop of the energy transition, with the move to electric mobility, will end up eroding demand”, warn the analysts of Julius Baer in a note.
