Oil price: The big signal

Not many saw that coming. Not even the traditionally most bullish takers on oil market. Observers have termed the latest moved by Saudi led Opec Plus cartel nothing short of a slap on Biden administration. Saudi Arabia and Russia have got uncomfortably close for the West’s likings, especially as the US made attempts to persuade the Kingdom to stay clear of any major production cuts.

As fears of global recession gained traction, and central banks around the world opted for more tightening, Opec Plus feared it was being cornered. The cartel calls the unprecedented move a preemptive call to avoid 2008-like situation when recession had triggered a collapse which took international oil prices to as low as $34/bbl.

The actual production cut would be close to 1.2 million barrels per day, which makes a little over 1 percent of global supply. Recall that key players such as Nigeria have already been struggling to produce up to their respective quotas. Although the quantum of proposed production cut is massive, it is the signaling by the strong cartel that stands out more than that.

The message is loud and clear. Opec Plus will go the distance to protect its interests, even if it takes taking the US heads on. The move has all the makings of a geopolitical shift as the Kingdom is believed to be getting too comfortable with Russia – for the West’s likings. Be that as it may, the signal is that Opec Plus has indirectly hinted at a medium-term range of oil prices, the downside of which, many believe, is $90/bbl.

The US has responded expectedly, threatening unleashing supply from its reserve banks, which many believe is nothing more than a bluff. The US is more likely to impose export bans on fuels, in a bid to reduce prices at pumps. That only means one thing – Europe gasping for more gas for the fast-approaching peak winter season.

The imbalance is expected to stay, as developing countries will continue to struggle meeting their energy needs. More expected tightening could further hamper the global demand and put pressure on oil prices. After the recent move, nothing is now off the table. Should demand outlook take oil prices down even after Opec Plus’s move – nobody is now ruling out the cartel unleashing further cuts to support prices, in the name of “adequate investments”.

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