Home Impact producer Column: OPEC+ seems to want crude oil at $90. He may end up defending $50: Russell

Column: OPEC+ seems to want crude oil at $90. He may end up defending $50: Russell

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The logo of the Organization of the Petroleum Exporting Countries (OPEC) is pictured at its headquarters in Vienna, Austria August 21, 2015. REUTERS/Heinz-Peter Bader

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LAUNCESTON, Australia, September 6 (Reuters) – It is tempting to dismiss the OPEC+ group’s decision to cut crude oil production by 100,000 barrels per day (bpd) in October as a statistical insignificance that is unlikely to have any real impact on the market.

While the grower group’s small adjustment to the production targets won’t make a big difference to the global balance between supply and demand, Monday’s announcement has significance: it signals the intention of OPEC+ to defend crude oil prices.

OPEC+, which consists of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, said it would reverse the 100,000 bpd increase in production in October, a move aimed at to support prices. Read more

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Although the group does not explicitly state its preferred price level, based on its current and recent actions, it is likely that the target is above $90 a barrel.

The problem for OPEC+ is that aiming for that level now, when the global economy is likely heading into an energy price-led recession, increases the risk of being forced to take stronger action to defend 50 dollars in six months after the demand crash.

OPEC+ likely based its October decision on the advice of the group’s technical committee that the market is expected to experience an oversupply of around 400,000 bpd this year, before moving into a slight deficit of around 300,000. bpd in 2023.

The message from some of the OPEC+ leaders, including Saudi Energy Minister Prince Abdulaziz bin Salman al-Saud, has been that the raw paper market has been volatile in tight trading and is pricing in a drop in demand which is not evident in the physical market.

This may well be a valid argument in the current circumstances. But the risk is that by the time mid-winter hits the northern hemisphere, the situation is entirely different.

Europe likely heads into recession as energy costs soar following the loss of Russian natural gas supplies as part of the fallout from Moscow’s February 24 invasion of Ukraine . Russia calls its actions there “a special operation.”

Soaring natural gas and liquefied natural gas (LNG) prices have pushed thermal coal to record highs. It has also kept diesel prices high as the fuel, used primarily for transportation, becomes competitive for power generation.

Soaring prices have already forced energy-intensive industries in Europe, such as metal smelters, to close or reduce production. The situation will only get worse in the coming months as the costs are passed on to small businesses and consumers.

RISING RISKS

The full impact of high inflation and rising interest rates usually takes some time to manifest. The risk for the global economy is that all the negative factors start to kick in around the same time, namely the peak in winter energy demand.

Crude oil prices have fallen during previous global economic contractions, and the same is likely to happen this time around. This would make it difficult for OPEC+ to defend a crude price level increasingly out of step with emerging economic realities.

A potential deal between Iran and the United States over the Islamic Republic’s nuclear program could also resupply the global market, further complicating matters for OPEC+.

It is not only in Europe where there is a question mark over demand. High energy prices are also starting to hurt Asian economies, adding to an already weak picture in China, the world’s biggest importer of crude oil.

China is battling to boost its economy after imposing COVID-19 lockdowns in several major cities earlier this year, and the lockdown of Shenzhen and Chengdu last week added to the idea that China could remain a weak spot for oil demand.

All in all, it is becoming increasingly difficult to say that crude oil should exceed $90 a barrel by the end of the year. The risk for OPEC+ is that if it tries to force the price to stay at this level by restricting supply, it will only cause a deeper and longer global recession.

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Editing by Kenneth Maxwell

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