For this week I will be doing a very short piece on OPEC+ cuts. I am on a short break (necessary for my mental health) and writing this sitting in the City of Winds, Baku the capital of Azerbaijan.
OPEC+ surprised the world by agreeing to a production cut of 2 mbpd. This happened when oil prices were falling as recessionary measures overtook the supply concerns that only a few weeks ago kept prices elevated. Despite OPEC+ not meeting its produciton target by 3.5 mbpd, there wasn’t enough oil demand to build on this shortfall. For example, manufacturing activity is being slowed in U.S. flashing early signs of recession. However, the CEO of Aramco said that countries will recover from this era of slow grwoth and suppl concerns will again become the greatest threat to oil markets. Mark has done an incredibly insightful episode on how all of this will work and I encourage everyone reading this to watch it:
Economic issues in China are one of the most important reasons for an impending demand reduction albeit many analysts do not think that there will be demand destruction. Unemployment in China (in the urban youth)reached to an all time high of 20 percent in July 2022 one of the highest.
Meanwhile, U.S. Treasury secretary has showed concerned over this decision by OPEC+.
She said that the move was ” “unhelpful and unwise” for the global economy, particularly emerging markets already struggling with high energy prices.”
U.S. has also accused the oil producing cartel to be siding with Russia as this decision will result into higher energy prices and therefore helping the country.
I personally believe that such production cut will come as a function of falling oil production from Russia and that most of the production quotas are not being met recently. Despite this I think that oil prices will remain range bound with a potential for another sell off.
The global economic scenario has become bleak in terms of a demand receovery phase that was supposed to carry on post-Covid. I will write about them during the week.
That’s all from my side for this week. See you all next week!
