OPEC Might Be Deluded as It Holds Aggressive Assumptions
Oil is down from April highs and OPEC might take some drastic action to achieve the prices it wants.
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Brent oil has been unable to break out of its year-long range of $75 to $90 per BBL, despite all the OPEC cuts since last year, which were both voluntary and involuntary and close to 6 MBPD of oil. This includes the 3.3 MBPD of OPEC members and the voluntary cut of 2.2 MBPD from Saudi Arabia and the United Arab Emirates, mostly.
Every time the speculative funds get long, hoping that oil is a "sure thing" cheap commodity, they get let down yet again as the price falls, taking all the speculators down with it as they salivate looking at their brethren, like copper and silver, move higher. Since April highs, oil is down another 15% and this is after OPEC decided to roll over its cuts through till the end of Q324. What is going on?
Well, OPEC has had all of this oil just sitting in the back waiting to be released and, now that it is saying it will start to do so from September onwards, the market got a tad bit worried that perhaps there is an end goal in sight to these cut barrels. Truth be told, OPEC is holding onto some very aggressive assumptions that 2H24 will magically see China come back and start buying up crude like it was in the 2000s.
Without understanding their demand needs or their pricing levels, they are calling for a 2.2 MBPD demand pick up this year alone, when China has not even come close to anything around that number even. China imported 11.06 MBPD in May, which was slightly up from April's 10.88 MBPD, but down a lot from the 12.11 MBPD in May 2023.
The decline in year-on-year imports has been put down to weak refining margins crimping output, and also China being very price sensitive. They buy more oil when prices are low and hold back when prices are too high. Moreover, their demand for new barrels is going into storage, not real demand. The same is seen in copper, as now Shanghai inventories have picked up since the start of the year. They too are price savvy, playing the arbitrage between exchanges, and the market is mistaking this as demand.
Everyone called for a recession last year, which never happened as Uncle Biden went on and on spending to save the U.S. economy from rolling over post-COVID-19. This is now seen in the national debt when, today, the U.S. interest expense alone is more than its defense spending and Medicare costs. The Fed needs to cut rates but it cannot risk letting inflation or market animal spirits cause a melt up. The labor market once again showed that it is indeed cracking as the unemployment rate hit 4% for the first time in 25-plus months. Demand is rolling over in the U.S. and the rest of the world has been weak throughout.
We all know OPEC has invested massively to maximize its oil revenue as they desperately try to diversify into other revenue streams, perhaps a bit too late in the oil cycle. Nonetheless, they want, or rather need, higher oil prices and use these demand assumptions to justify capex spend. There is no shortage of oil, at least not on today's demand assumptions. If anything, if we enter a global recession, which looks likely, OPEC may need to take even more barrels out of the market.
Will they have the courage to do so, or give in to waiting for a higher price altogether?
At the time of publication, Bengali had no positions in any securities mentioned.
