OPEC+ Cut Had Enough Firepower to Take Oil to Explosive New Levels

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author)

One of Rigzone’s regular market watchers looks at the surprise OPEC+ cut, talk of oil demand being inelastic to price, oil market volatility and more. Read on for more detail.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Barani Krishnan, Senior Commodities Analyst at uk.investing.com: Demand for oil, at least on the U.S. front, turned out higher than expected last week. But the real surprise, and no way that phrase could have been better defined, was in OPEC+ decision to add a cool 1.7 million barrels daily to its November announced cut of 2.0 million barrels per day.

Rigzone: What were some market surprises?

Krishnan: At the crux of it, the latest Saudi-crafted OPEC+ production cut had enough firepower to take crude prices to new explosive levels north of $100 a barrel. That’s on paper. In reality though, there’s something mightier - the economy.

The biggest news on oil demand since this year began has been on Indian and Chinese buying, spurred by Russian oil cheapened by Western sanctions. The Saudis, as the dominion force of OPEC+, want a slice of that demand pie. But the Chinese and Indians will likely slow their buying once prices start rising from the latest production cut. 

There’s talk that oil demand is inelastic to price but the reality is like everything else, higher prices will slow down consumption of energy. India and China have bought enough barrels to likely keep them going for the next six months or so. It could be around September when they step up major purchases again. 

The price of oil cannot be inelastic enough for the next six months especially if a global recession hits. It’s like what Don Corleone tells the Vatican in Godfather 3 when asked to submit a huge check for the restructuring of the church. “Your s(ins) will be forgiven, Don Corleone,” he’s told. The Godfather replies: “Do not overestimate the power of forgiveness!”. 

Saudi Arabia’s Crown Prince MbS has overcommitted to the development of the Kingdom and now needs a barrel at minimum $80 to fund that over the next five to eight years (not factoring in inflation yet). China is still dragging its feet on new purchases. The Saudis are pushing their luck with the global economy, expecting the world to pick up the redevelopment bill for Saudi Arabia. There are limits to everything. 

The 2008 financial crisis, and the speed at which the market retracted from the post-Ukraine highs of $140, shows how elastic oil prices can be when times get hard for the ordinary folk. The inability of oil to rally beyond the announcement highs of last week, despite bullish U.S. demand data, is clear evidence of this.

Rigzone: What developments/trends will you be on the lookout for this week?

Krishnan: Volatility that could cap the $80 highs in crude.

To contact the author, email andreas.exarheas@rigzone.com