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OPEC Cut and Oil Price Analysis

OPEC Cuts Fail to Convince Market

The agreed output cut was expected to have a positive impact on crude oil prices, translating into stability and potential growth in the oil market. By constraining supply, the output cut aims to address surplus conditions and mitigate downward pressure on prices.

Cuts of about 1 million barrels a day mean that OPEC is seeking a floor of about $80 a barrel.  However, there was disagreement of individual quotas by both Nigeria and Angola.  In addition, the UAE was hesistant to cut output.  Will Russia comply with budgetary contraints in carrying out the war in Ukraine?

Saudi Arabia and Russia agreed to extend their cuts further into next year.   In short, the  extra cuts will work out to about 700,000 next quarter.

Chinese demand increased this year after the covid-lockdown, but this demand will fall next year.  Chinese growth is less than the market estimates in our opinion and was mentioned in our previous article.  In our previous article, we mentioned that CICC, one of biggest investment banks in China, was banned from reporting bad news about the Chinese economy.   Foreign direct investment (FDI) has turned negative for the first time since 1998.  Add in the real estate woes and the China rebound story does not add up.  Expect less demand for oil coming out of China next year.

Additionally, European growth is slowing down and we expect the US to also go into recession next year.

Below please find the WTI price chart.  In addition, I have added the price chart of BP since it is the oil major that is probably the most exposed to the oil price.  As part of our trading education,  we continue to hold put options on BP heading into next year to back up our view that oil price will weaken.  Thus, we are taking a directional trade on further oil price drops.

WTI oil price chart

WTI oil price chart

Please find the price charts of BP below:

BP Price Chart 1:  November 30 2023

BP Price Chart 2:  November 30 2023