Prices at the pump have been going down…but they may not stay that way.
Last week the group of oil-exporting countries, OPEC Plus, got together.
The group of 23 countries controls about 50% of the global oil supply, so when OPEC makes decisions, it impacts prices. In fact, OPEC Plus has sometimes been referred to as ‘the central bank of world oil’.
It was their first face-to-face meeting since the start of the pandemic, and traders were expecting a big announcement.
And it was…kind of…I’ll get to that in a bit.
OPEC Plus announced that from November, they’ll be cutting oil production targets by two million barrels per day (bpd), or about 2% of the global oil supply.
Brent oil prices jumped right after the announcement.
OPEC says it’s looking to put a floor on oil prices, yet the cuts are coming after months of lobbying by US President Joe Biden to get them to increase their oil production.
Of course, it probably didn’t help his case that the US has been decreasing its oil imports from OPEC countries. Since the shale revolution, the US has been pumping more oil.
Or that the US, along with many other OPEC clients, has been looking to move away from oil and into renewables for energy independence.
Needless to say, Biden is ‘disappointed’. Mid-term elections are coming up, and it’s well-known that high oil prices don’t win votes.
Now there’s a lot of chat in the US about retaliation…
From whether to stop sending military supplies and arms to Saudi Arabia to reviving the NOPEC (No Oil Producing and Exporting Cartels Act) bill.
NOPEC would allow the US to sue countries in the OPEC for trying to limit the supply of oil to impact prices. But, of course, that would just make oil prices go higher.
What’s certain is that there’s an interesting global dynamic at play.
Central banks have been raising rates and tightening the strings to keep inflation at bay while oil producers are decreasing production, which will push up inflation.
Geopolitics are taking over global energy markets.
Oil wars
At the moment, oil prices are sliding.
Brent is trading at around US$94 a barrel with fears that a recession could impact demand.
But there are plenty of other factors that are and could impact tight oil markets.
For one, there’s China.
China is by far the largest importer of oil in the world. Yet things have been subdued over there due to COVID. China is still focusing on a zero-COVID strategy with lockdowns and travel restrictions in place. If China were to open up, it would increase demand for oil.
On the supply side, the US has been releasing oil from its strategic oil reserves to bring oil prices — and inflation — down. The US is releasing another 10 million barrels in November, but those inventories are down by 35% since 2021.
Then there is the issue of oil production. Production has been hit by low oil prices in 2014–16, when US shale oil hit world markets, along with a decrease in oil demand from the pandemic in 2020.
So while in their latest meeting, OPEC Plus cut oil production by two million barrels a day, that’s just a quota target.
In reality, many of the countries haven’t been hitting their quotas. That is, they aren’t producing as much as their quotas allow them to. So the actual cuts are expected to be lower than two million bpd — between one million and 1.1 million bpd.
Last but not least, starting in December, the EU is banning Russian oil imports coming by sea, and the G7 is also mulling over placing a price cap on Russian exports, all of which could decrease the availability of oil.
All in all, things are looking very tight in oil markets, in particular with so much geopolitics at play.
Nobody said the energy transition would be easy
In the short term, high oil prices are looking likely.
Of course, all this goes out the window if there’s a financial crisis. But, with supply so tight, any oil supply disruption could really hit oil prices. And with tensions running high on both sides, it’s a likely scenario.
Over the long term, though, the energy transition is the solution for these energy woes, and in fact, high energy prices could accelerate the transition.
All the best,
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Selva Freigedo,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.
