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Investing.com – OPEC+ announced a daily output cut of 1.65 million barrels per day, escalating strongly and spitting out several angry rhetoric from the US side, which fears this increase will affect the already high inflation rates in the US. But the question now that the downsizing has subsided, traders are looking at oil with a question: Will it continue to rise, taking advantage of the new geopolitical tensions between China and America due to the Taiwan Peninsula, or will prices gradually decline again?
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Major banks in America raised their oil price forecasts, including Wells Fargo and Goldman Sachs (NYSE:) immediately after the OPEC+ cut, yet many traders still believe that the tense economic outlook will prevent the group’s actions from pushing prices higher. The dial indicators are also starting to flash warning signs.
It may end up becoming the ultimate test of what matters most to the market: tightness in supplies, or a lackluster demand picture. This is likely to lead to more uncertainty about the direction of prices – a complex development for the Federal Reserve and the world’s central bankers in their ongoing battle against inflation.
“It’s a very difficult market to trade right now,” said Livia Gallarati, chief analyst at Energy Aspects. “If you are a trader, you are sandwiched between what is happening on a macro level and what is happening fundamentally. They are two different directions.”
One thing is certain: a major shift in market control has now been cemented in the hands of Saudi Arabia and its allies, with massive ramifications for geopolitics and the global economy.
Investors have continued to reward US drillers for production discipline, making it unlikely that shale companies will again undertake the kind of turbulent growth that helped keep energy inflation tame in the past decade. This leaves the oil market under the supervision of OPEC + at a time when some experts predicted that demand is heading to a record level.
“The sudden OPEC cuts have already raised fears of a return to inflation,” said Ryan Fitzmaurice, lead trader at commodity brokerage Marex Group Plc. “These renewed concerns about inflation should only increase” in the coming months, he added. Below we take a look at the most important things that traders will look at in the coming period.
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summer demand
The timing of OPEC’s decision struck an odd chord for many oil experts.
The production cuts will not take effect until May, and much of the fallout is likely to be felt in the second half of the year. This is when oil demand typically reaches its seasonal peak, due in part to the busy summer driving season in the United States. It is also the point where China’s economic reopening is expected to start swinging at full swing, further supporting demand.
Normally, OPEC would like to take advantage of this sudden depreciation by selling into the market as much as possible. Instead, a cut means the cartel is backing off. This sparked debate about whether the move would eventually drive oil prices to 100 per barrel as demand soared, or whether, instead, the union and its allies were preparing for a summer slump of tepid consumption.
“While the OPEC+ cuts surfaced are viewed as generally bullish, they also raise concerns about the demand outlook,” said Warren Patterson, head of commodity strategy at ING. “If OPEC+ is confident of a strong demand outlook this year, will they really feel the need to cut supplies?
Movements in global fuel markets underline demand uncertainties. While oil prices have risen, moves on refined products have been less pronounced, squeezing refiners’ profit margins (TADAWUL:) across Europe and the US. In Asia, diesel prices, a major refining product, point to growing fears of a slowdown as spreads narrow to their lowest levels since November.
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futures curve
Talk of $100 oil has been hype since the end of last year, but the can seems to keep getting bigger. First, some analysts expected prices to get that far in the second quarter of 2023. Supply has been pushed into the second half of the year, and now even some of the biggest bulls don’t expect the magic number to appear until 2024.
The oil futures curve reflects that expectation. Contract prices linked to deliveries through December 2024 and 2025 have risen, even as the benchmark month-to-month futures contracts begin to decline.
“The OPEC+ production cut certainly raises the possibility of $100 a barrel this year, although it is by no means certain,” said Harry Altham, analyst at brokerage StoneX. “Obviously, the weakness in the demand side caused by growth considerations plays a more prominent role.”