Market Musings 081022:
Energy remains a strong point in a weak market tape

OPEC+ put a floor under global crude oil prices.

This week’s podcast:

Is the incredible growth in ETF popularity justified?

  • What is an ETF and why is it so attractive?
  • What are passive and active funds?
  • With so many ETFs on the market, how can investors know which ones to choose?
  • How do ETFs ensure that temporary cash is put to good use?
  • Are there any downsides to ETFs?

Summary:

  1. Crude oil prices rebound higher…
  2. As the OPEC+ oil-producing nations announce a 2 million barrel/day production cut
  3. The US will also have to stop releasing their Strategic Petroleum Reserve soon
  4. Chinese oil demand could rebound upon progressive economic reopening
  5. These supply and demand factors suggest higher oil prices
  6. A lot more investment will be needed for the energy transition

The path of least resistance for oil prices is... Higher

Crude oil prices have been drifting lower since peaking in early June at over USD120/barrel. They recently even fell to below where oil prices were prior to the Russian invasion of Ukraine in late February. Financial markets have been concerned about global recession risks and the consequent pressure on oil demand.

Crude oil prices rally on news of OPEC+ production cut

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Source:Bloomberg

However, the OPEC+ oil cartel has changed this dynamic with their announcement this past Thursday at their Vienna meeting of a 2 million barrel/day oil production cut. This reduction in oil production is to take place gradually between November this year and the end of 2023. In the table shown here, note that the key oil-producing countries to cut production will be principally Saudi Arabia, Russia, the UAE and Iraq.

OPEC+ oil cartel announced a deep 2 million barrels/day production cut

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Source: OPEC

Even though this announcement is somewhat of an exaggeration given that many OPEC+ members are already today NOT producing to their current oil quotas, the reduction in real oil production is still likely to be around 0.8m-1.0m barrels/day, still nearly 1% of global daily oil demand.

The US will stop their crude oil release of stocks from the SPR soon

Following the OPEC+ production cut announcement, President Biden on Wednesday said he would release 10 million more barrels of oil from the U.S. Strategic Petroleum Reserve (SPR) in November in a move to counter raising…

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