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Oil Rolls Back Labor Day Gain, Loses More With OPEC+’s Tiny Cut

Published Sep 06, 2022 02:51PM ET
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By Barani Krishnan

Investing.com -- Lip service seldom lasts long. And so too with OPEC+’s inconsequential cut of 100,000 barrels per day in production.

Crude prices were back to where they were on Friday — in the red — as Monday’s thin-holiday-volume boosted 3% gain was rolled back by traders who reckoned that the cut equivalent to 0.1% of global daily demand would do jock for a market more worried about the impending U.S. September rate hike and China’s COVID lockdowns.

The Dollar Index, which pits the greenback against the euro and five other major currencies, hit a 20-year high of 110.54 on Tuesday on continuous bets that the relatively strong US jobs report for August could embolden the Federal Reserve in carrying out its third straight 75-basis point rate hike on Sept 21.

A runaway dollar basically makes commodities priced in the U.S. unit, including crude, costlier when acquired with other currencies.

In China, most of the 21.2 million residents of Chengdu city faced extended curbs on their movements even as the estimated 18 million in tech hub Shenzhen saw an easing of lockdown conditions imposed since Monday.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled Tuesday’s trade down at $86.88 per barrel, up just a penny from Friday. Last week, WTI fell 6.7%.

Brent, the London-traded global benchmark for oil, settled at $92.83. down $2.91, or 3.04% from Friday. For last week, Brent lost 6.4%.

WTI reached a session high of $90.37 on Monday, while Brent rose to $96.99.

That rally came in a knee-jerk reaction to OPEC+’s announcement that it would cut output by 100,000 barrels per day in October. The market’s upside seemed stretched by momentum rather than clear thinking amid thinner-than-usual holiday conditions.

By the start of Tuesday’s trading in Asia, the market began rolling back the previous day’s gains as traders realized OPEC+ was merely planning to roll back on paper the same 100,000 bpd production increase that it announced a month earlier.

The 23-nation OPEC+ comprises the original 13 members of the Saudi-led Organization of the Petroleum Exporting Countries and 10 other oil producing allies steered by Russia.

By Tuesday’s session, OPEC+’s production cut was branded as “symbolic”  — precisely what it was — as the market caught up with the alliance’s game. It was also clear that the move had been forced by elements within OPEC+ hanging onto Saudi Arabia’s hint from two weeks ago that a reduction of some sort was necessary to restore some of the market’s bullish psyche after a 30% price drop from its March highs.

"While the headline number is for a 100 mbbls/d cut, in reality, the actual cut will be much smaller,”  said Warren Patterson, head of commodities strategy at ING. “Most producers have not been able to hit their targets and are producing quite some distance below where they should be.”

Balancing, or rather “supporting,” the OPEC+ action was Noah Barrett, research analyst for energy and utilities at Janus Henderson Investors, who said in another note the cut "indicates that OPEC+ is watching demand very closely and is trying to manage supply to keep a floor on oil prices.”

Be that as it may, the reality is that with the end of the peak U.S. summer driving period, consumption numbers for crude as well as fuel products could stall despite robust demand at pre-pandemic highs now. 

The fledgling U.S. recession and potential for a deeper slowdown across Europe, along with the on-off lockdown of China are also expected to weigh on oil demand.

Oil traders are also watching for any remote possibility that the Iran nuclear deal could be revived to unlock U.S. sanctions that could allow up to a million barrels of oil from the Islamic Republic to be legitimately exported on the global market.

The White House made clear on Friday that there had been no agreement as yet to revive the nuclear deal. The EU’s chief diplomat Joseph Borrell also said on Monday that efforts to strike an agreement on the deal were “in danger” after the U.S. and Iranian positions diverged in recent days.

While the latest developments on Iran may be favorable to oil bulls, offsetting that somewhat was the agreement by the Group of Seven finance ministers on Friday to cap the price of oil sold by Russia. While Moscow has vowed retaliation against countries that implement the decision, it is also likely to undercut other OPEC+ producers in selling its oil wherever possible to make up for lost revenue. Russia’s aggressive discounting on oil on the physical market will ultimately matter on the futures market,  aside from weighing on the pricing of competing OPEC+ oils, including Saudi crude.

Oil Rolls Back Labor Day Gain, Loses More With OPEC+’s Tiny Cut
 

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Comments (3)
John Berry
John Berry Sep 06, 2022 6:46PM ET
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It's all a scam
Thunder Twentyone
Thunder21 Sep 06, 2022 4:15PM ET
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Good news is bad news: lower market ahead
Barani Krishnan
Barani Krishnan Sep 06, 2022 4:15PM ET
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Here and there, yes.
EL LA
EL LA Sep 06, 2022 3:42PM ET
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Obviously, the market needs to see much more oil cut from OPEC+ and as they say they can and will do so at any time necessary. The more rates are hiked, the more oil supply must be cut to meet the forced receding demand dictated by recessionary times. Of course, a potentially destructive hurricane or five may be cause for alarm, but rate hikes are certain.
Barani Krishnan
Barani Krishnan Sep 06, 2022 3:42PM ET
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Fair comment, EL LA. Thanks and bests.
Barani Krishnan
Barani Krishnan Sep 06, 2022 3:42PM ET
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But there's one problem: There will be very little real cuts. Because of Russia's massive discounting and stealing and market share from anyone who cuts (unfortunately the lion's share will be Saudis) eventually Aramco will feel the heat. As it is, last month they reduced -- not increased -- OSP to Asia. That tells you the economics of cutting.
 
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