Oil inflection point
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OPEC+ slashes 2M bpd from production quotas as risk-on bias juices markets
Alaska North Slope crude rose $2.10 Oct. 5 to close at $93.88 per barrel, while West Texas Intermediate rose $1.24 to close at $87.76 and Brent rose $1.57 to close at $93.37.
The gains came after the Organization of the Petroleum Exporting Countries and its allied producing countries announced a 2 million barrel per day oil production cut from the August required production levels for the group, known as OPEC+. The reduction will go into effect in November.
The action was taken “in light of the uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market, and in line with the successful approach of being proactive, and pre-emptive,” OPEC said in an Oct. 5 release.
Oct. 4 saw even larger oil price increases as anonymous delegates arriving in Vienna ahead of the Oct. 5 OPEC and non-OPEC Ministerial Meeting told media that a production cut of up to 2 million bpd was being considered.
ANS jumped $2.53 on the day to close at $91.78, WTI leapt $2.89 to close at $86.52 and Brent leapt $2.94 to close at $91.80.
Those gains built on sharp increases the previous day sparked by a risk-on atmosphere that lifted financial markets following an intervention the week before from the Bank of England to calm the UK bond market.
ANS popped $2.35 Oct. 3 to close at $89.26, as WTI skyrocketed $4.14 to close at $83.63 and Brent rose 90 cents to close at $88.86.
U.S. equities surged Oct. 3 and Oct. 4 to deliver a rare two-day return of over 5%. The surge may reflect an inflection point in markets which have collapsed since highs set in late 2021, carrying commodity prices - including oil - lower on recession fears.
The two-day spike was the largest since the 2020 recovery from the COVID crash.
Every time such a rise has occurred since 2006, it has followed a policymaker intervention to quell significant risk to, or destabilization of, the global financial system, according to Bryan Rich, founder of the Billionaire’s Portfolio.
“Major turning points in markets have often been the result of some form of intervention - i.e., policy action or adjustment,” Rich said in Pro Perspectives Oct. 5.
“Based on this history, it’s fair to say that we are at a significant moment, seeing significant vulnerabilities in the financial system (driven by rising rates), and we’ve seen a significant response (by the Bank of England),” he said.
While investment risk-on sentiment has supported oil prices, drawdowns in U.S. inventories for the week ending Sept. 30 evidence resilient demand.
U.S. commercial crude oil inventories - excluding the Strategic Petroleum Reserve - dropped 1.4 million barrels from the week prior to 429.2 million barrels - 3% below the five-year average for the time of year, the Energy Information Administration said in an Oct. 5 report.
Total motor gasoline inventories fell 4.7 million barrels for the period to 9% below the five-year average for the time of year, the EIA said, adding that both finished gasoline and blending components inventories decreased. Distillate fuel inventories dropped 3.4 million barrels to 21% below the five-year average for the time of year.
The market absorbed an additional 6.2 million barrels of crude from the SPR during the week, taking the nation’s emergency supply to 416.4 million barrels on Sept. 30, according to EIA data. The SPR held 617.8 million barrels on Oct. 1, 2021.
Oil prices slipped on the last two days of September.
ANS dropped $2.12 Sept. 30 to close at $86.91, while WTI dropped $1.74 to close at $79.49 and Brent trimmed 53 cents to close at $87.96.
ANS closed 53 cents lower Sept. 29 at $87.96, WTI was down 92 cents to close at $81.23 and Brent fell 83 cents to close at $88.49.
From Wednesday to Wednesday, ANS rose $4.44 from its Sept. 28 close of $89.44 to finish at $93.88 Oct. 5.
OPEC versus the FedOPEC is incentivized to reduce output because it is the only oil producer in the world with spare capacity, according to Jeff Currie, global head of commodities research at Goldman Sachs.
“I like to argue that the old oil order is back,” he said in an Oct. 3 CNBC interview.
“OPEC is probably more powerful than it’s ever been in its 60-year history since its inception,” he said, adding that one of the key reasons is the fact that there has been a dearth of investment in alternate energy sources, so OPEC is really the only game in town.
The reason OPEC would want to squeeze output in the context of extremely low inventories and a record tight market is that the prices are down more than 40% because investors are fleeing the market, he said.
“One way to attract capital back into the sector is kick up the backwardation … is to roll yield on the front of that curve,” Currie said. “Right now, you have cash paying 5% 12-month LIBOR and the question is what can they get oil to pay on that roll yield and if they risk-adjust it and get it high enough you’re going to attract capital back.”
The financial story and the fundamental story for oil can be thought of as two different stories, Currie said.
“The financial story is controlled by the Fed - they’re reducing liquidity, but the fundamental story is driven by OPEC - they’re potentially taking oil supply out of the market,” he said. “It’s OPEC versus the Fed.”