Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Oil: Saudi Cuts Vs. Central Bank Hikes - Who’ll Win?

By Investing.com (Barani Krishnan)CommoditiesJun 28, 2023 05:24AM ET
www.investing.com/analysis/oil-saudi-cuts-vs-central-bank-hikes--wholl-win-200639475
Oil: Saudi Cuts Vs. Central Bank Hikes - Who’ll Win?
By Investing.com (Barani Krishnan)   |  Jun 28, 2023 05:24AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
LCO
+1.89%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CL
+1.98%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • As Saudis double down with cuts, central banks will go the other way with rates
  • Hard to make a call on oil prices as the West still growing despite recession mantra
  • Ultimately, Saudis might flood market if all gambit for higher prices fail
  • InvestingPro Summer Sale is on: Check out our massive discounts on subscription plans!

In a perfect world, Brent would be $80 a barrel now, $90 in July, and $100 in August. You know what I’m going to say next — there’s no such perfect world. You also know there’s nothing profound in that and neither do I feel like the smartest guy in the room saying it.

But I’m going to urge you to think a little deeper about two things.

The first is the Saudis have pledged to cut a million more barrels per day from their output in July and will continue doing so until they see the price per barrel they want or they get to “balance the market” (the latter is the bull they normally feed us to mask the impression of them being price hawks).

The second thing you need to consider a little more intensely is that the Federal Reserve, the European Central Bank, and the Bank of England seem determined to slay the inflation beast and have pledged to keep raising rates as long as necessary to achieve that. And we know that higher oil prices feed into higher inflation.

Now, put the two things together: The Saudis will cut as much production as necessary in the coming months to get the oil prices that they want while the central banks respond, albeit with some lag, with commensurate rate hikes each time inflation becomes a threat. We also know there is a positive correlation between oil demand and economic growth and the higher rates go, the greater the chance of them slowing economies as a whole and causing recessions.

So, now comes my question to you: Who do you think will win this game?

Feel free to articulate your thoughts in the comments field but my answer is: Neither side is going to really get what it wants.

The popular theory is that the core inflation watched by central banks is free of volatile food and energy prices. The reality is higher oil prices would have already impacted the larger economy even before the energy component is stripped out. So, whether it's headline or core inflation, both are correspondingly higher with pricier oil.

The Saudis will probably get the $80 per barrel that they seek at some point next month and may see even $90 if there’s a major disruption in supply in any part of the world, or if demand for oil — typically stronger in the summer than any other season — gets insanely high.

Lower Lows Likely for Oil Prices, Rather Than Higher Highs

If that were to happen, there’s also a great likelihood that the resultant inflation from such oil prices will trigger the Fed, ECB, and BoE into further tightening. Thus, any oil rally will probably be moderated before not too long, and crude prices could see lower lows, rather than higher highs.

Simply put, there’s just no easy way to call oil prices at this moment because of real dynamic economies in the West that are still registering growth despite Wall Street’s recession mantra, the latest prophesied on Tuesday by HBSC which expects a U.S-to-European slowdown to begin by the fourth quarter.

Phil Flynn, energy analyst at Chicago’s Price Futures Group one of the most ardent oil bulls out there, commiserated about the fate that’s beseeched those long crude in a note issued Tuesday:

“The war on inflation is causing the market to look beyond the current fundamentals for oil as they count on a recession to equalize supply. More [Wall Street] banks are calling for the Fed to get more aggressive.

Morgan Stanley’s call is for the Fed to raise interest rates by a 25-basis point hike in July raising the terminal rate to 5.375% versus the 5.1% that they previously had predicted. Speculation that the Fed was done raising rates seems to be off the table for now and instead of taking the leadership role, the U.S. Federal Reserve seems to be following the ECB president Christine Lagarde back into its aggressive interest rate hiking phase.”

U.S. oil demand, meanwhile, was at its highest last week since December 2020, Flynn noted.

“On the flip side of that we’re seeing signs that the demand for oil currently is far from recessionary levels. JPMorgan reported the global gasoline demand growth of 365,000 barrels a day year over year and that was driven by strong U.S. gasoline consumption and now with consumption at an 8-week high of 9.4 million barrels a day and predictions that we will see a record-breaking 4th of July holiday, one would expect that those demand numbers could exceed 10 million barrels a day at least for the holiday.”

To me, some of the mind-boggling growth in U.S. employment now is due to companies and businesses spending on hiring the remnants of money handed out during three years of pandemic relief. You have a labor market that’s not going to retreat easily. Along with that market’s charge, the economy is bringing along the power of pricing.

OPEC and Central Banks Only Have One Tool Each to Sway Markets

That power is exactly what the Fed officials don't want the economy to have now. They want the good part of the economic boom — the growth — but not the bad part — the inflation. The central banks are in the same situation as OPEC. Just like how the cartel has only one tool — control of supply — to calibrate demand and prices, central banks have also just one resort: rates, which they can either raise or cut, to prompt the economy into desired action.

Both sides are going to try and use the singular tool in their possession to gain maximum advantage.

OPEC can argue that the current inflationary problem is a pandemic-era excess, caused by the United States’ spending of trillions of dollars on relief programs that were overextended for anyone’s good.

It can accuse the Fed of being lax, sleeping at the wheel, and trying to catch up by blaming OPEC and pricey oil for the situation. I’ll accept that argument. What doesn’t change is that if U.S. crude prices go now from $70 to $90, it’s not going to make the situation any easier for the central banks.

With demand from China not coming in as expected, the only way for the Saudis to get oil prices will be to keep dropping production while the Fed and its peers jack up rates to try and quell that inflation monster.

So which of the two is greater in force?

As much as oil demand is touted to be inelastic, what needs to be remembered is that the consumer doesn’t have a bottomless abyss for a wallet, nor an infinite threshold of pain for inflation.

If the Saudis think they are better off selling fewer barrels for higher prices, then the question really is how many will be willing to pay, say $100, per barrel? It could be fewer than they think. Demand is going to drop for sure.

If all fails, the Saudis will likely flood the market with supply as they always do to punish the world for not following their way. They did so three years ago when the Russians refused to come on board with more production cuts just before the pandemic. The result was a WTI that went to minus $40 per barrel.

The problem for the Saudis this time is that the shale patch is no longer majority-owned or run by shaky independent producers who barely can resist prices below $40. Now, shale is a game involving the ExxonMobils and Chevrons.

Three years of price turnarounds and cash conservation have left shale drillers with much deeper pockets to withstand a price war. And incredible improvements in drilling efficiency — the tumbling U.S. oil rig count versus higher production is proof — have brought producer cost per barrel down to the low $30s now.

Said John Kilduff, partner at New York energy hedge fund Again Capital:

“The Saudis really need consistently high oil prices to keep plonking hundreds of billions of dollars into their economic diversification away from oil. Creating another 1970s-style oil crisis, where you’d have the world begging at your feet for barrels while you gloat, may not be that easy.”

***

Get ready to boost your investment strategy with our exclusive summer discounts.

As of 06/20/2023, InvestingPro is on sale!

Enjoy incredible discounts on our subscription plans:

  • Monthly: Save 20% and get the flexibility of a month-to-month subscription.
  • Annual: Save an amazing 50% and secure your financial future with a full year of InvestingPro at an unbeatable price.
  • Bi-Annual (Web Special): Save an amazing 52% and maximize your profits with our exclusive web offer.

Don't miss this limited-time opportunity to access cutting-edge tools, real-time market analysis, and the best expert opinions.

Join InvestingPro today and unleash your investment potential. Hurry, the Summer Sale won't last forever!

Summer Sale Is Live!
Summer Sale Is Live!

****

Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

Oil: Saudi Cuts Vs. Central Bank Hikes - Who’ll Win?
 

Related Articles

Phil Flynn
The Energy Report: Product Flop By Phil Flynn - Feb 29, 2024 4

Oil prices hit a three-and-a-half month high, yet the oil products flopped in hopes that refiners may be able to meet current demand. Even as gasoline demand hit a three-week high,...

Oil: Saudi Cuts Vs. Central Bank Hikes - Who’ll Win?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (18)
Derick Lim
Derick Lim Jun 29, 2023 8:23AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
AI win hands down
Tonemeister CEO
Tonemeister CEO Jun 28, 2023 1:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Like the '70s oil is being weaponized. It's in the Saudi's interest to get a higher price, the budget, and diversification are the main factors. What you don't hear is the backroom geopolitics and the MBS pivot to China & Russia. How's that working out, burning your US friends? Russia & China have their own strategy for weakening the US economy, and China benefits from Russia's undercutting the Saudis stealing market share. The question remains, what does MBS really get for not being the reliable US supplier they have expected from the House of Saud? I don't believe this is all about money and the price of oil.
Tonemeister CEO
Tonemeister CEO Jun 28, 2023 1:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Weaken the world's purse strings, while a tyrant wages war, a robber baron who thinks himself Emporer seeking a resource-rich land. Funny how all the main pipelines to Europe run through Ukraine. Plenty of them costs lots of money (PA).
Barani Krishnan
Barani Krishnan Jun 28, 2023 1:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Tonemeister CEO  Thanks for the insights.
EL LA
EL LA Jun 28, 2023 12:15PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Oil wins, as long as governments keep spending, especially as governments keep spending on idiotic ways to replace oil while using more of it.
Adam Sam
Adam Sam Jun 28, 2023 11:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I thank this writer , he is the one show me this app is a low quality economics company , before I read his articles I was 50P, now 100%. I use to open it every day few times . now every week few times soon every month ....
Barani Krishnan
Barani Krishnan Jun 28, 2023 11:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Learn to use proper grammar too. There are many apps for that.
Jim Morrison
Jim Morrison Jun 28, 2023 10:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
not a word about the manipulation of using our SPR to artificially bring down prices. c'mon man you know this is all b*******.
Barani Krishnan
Barani Krishnan Jun 28, 2023 10:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Not a shred of decency on your part to acknowledge the balanced reporting here but you go on squawking instead about the usage of a reserve that's already winding down. Cmon, man, you really need to open up that brain of yours to bigger vistas.
EL LA
EL LA Jun 28, 2023 10:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The bankers just want a bigger piece of the pie. Just hope they don't try and hog the whole pie again.
Investor Sss
Investor Sss Jun 28, 2023 10:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Article made to hit on Saudis and their call to stabilize the prices. You can see how unorganized market in other commodity prices spiked. I think your article is biased
Adam Sam
Adam Sam Jun 28, 2023 10:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
you know Coin Pusher game machines. some writers like that , put the coin then give them the target 🤣, If Saudi put the coin on the same writer he could say the opposite and he could write against his own country. may be Saudi need to learn using Coin Pusher media machines 🤣🤣
Barani Krishnan
Barani Krishnan Jun 28, 2023 10:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Adam Sam  Oh please, no one pays or tells me to write anything; I write what I wish to, "Adam Sam" ...  which I know is a pseudonym for a Saudi sympathizer. And "sss", who's right above, the Saudis aren't calling for prices to "stabilize". They will do everything to push this market higher and higher if they could. It's the job of people like me to call that out; that's exactly what I'm doing.
JQ Aman
jqaman Jun 28, 2023 8:40AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Demand is increasing, supply is shrinking and the price is still dropping. What happened to the laws of supply and demand? Nothing, just give it time...
Gonzalo Ribeiro
Gonzalo Ribeiro Jun 28, 2023 8:18AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Hiking interest rates doesn't end inflation, it only kills demand. If CBs actually wanted to end inflation they would contract the M3 money supply
Claudio Vassallo
Claudio Vassallo Jun 28, 2023 8:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
maybe this is why buffet Is buying oxy: you need to extract more oil in USA
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email