Amid The OPEC Cuts, Geopolitics Is At Play
Beyond higher petrol prices, the effects of OPEC’s production cut may be felt all over the world.
“With Biden and the Federal Reserve, OPEC is engaged in a Cold War and is retaliating with its sole “weapon”—production. THE DEMAND IS RISING, “Energy trader and editor-in-chief of The Energy Word newsletter Dan Dicker tweeted.
According to JP Morgan and Goldman Sachs, OPEC’s decision to reduce output may have been influenced by the US decision not to repurchase oil to replenish its Strategic Petroleum Reserve.
The New York Times reports that in an apparent effort to drive up prices, Saudi Arabia, Russia, and their oil-producing allies announced on Sunday that they would reduce production by about 1.2 million barrels of crude per day, or more than 1% of global supplies.
According to oilprice.com, West Texas Intermediate reached $80.52 on Monday, up $4.85, and Brent crude was trading around $85 per barrel, up $5.10.
According to AAA, the national average petrol price in the US on Monday was just over $3.50 per gallon.
Alexander Novak, the deputy prime minister of Russia, claimed that the Western banking crisis and “interference with market dynamics,” a term used to describe a Western price cap on Russian oil, were two factors contributing to the reduction.
According to Andy Critchlow, EMEA head of news at S&P Global Platts, “[the organized voluntary cuts] certainly would play into the narrative that the US is losing its influence in the region to… influence the actions of core OPEC producers like Saudi Arabia and the UAE, which have traditionally been client states of the US.”
He said, “You really can’t look at this in isolation from the broader geopolitical situation in the Middle East, which is seeing these core oil producers shift closer to China, shift significantly closer to Russia. They prefer to operate in this multipolar world rather than being wholly dependent on the US, you know.
The West has charged OPEC with price-fixing and supporting Russia, which has been at war with Ukraine since February 2022.
The US is debating enacting the NOPEC bill, which would permit the seizure of OPEC assets on US soil if evidence of market collusion is found.
Tamas Varga of oil broker PVM, “the voices of the NOPEC bill proponents in the US Congress will also get louder and they will accuse OPEC+ of using oil as a weapon.” “The move (by OPEC+) is categorically positive at this point because supply concerns have supplanted macro concerns. The Saudi-US relationship will further deteriorate as a result of the action.”
In response to concerns that Western economic sanctions would disrupt Russian supply, OPEC+ has criticized the International Energy Agency, the West’s energy watchdog, for releasing oil reserves last year. The US is the agency’s largest financial contributor.
The OPEC+ member with the highest proven reserves and GDP is Russia. The Organization of Petroleum Exporting Countries (OPEC) has 13 members; OPEC+ has 11 additional non-OPEC members. According to nasdaq.com, OPEC is responsible for 80.4 percent of the world’s proven oil reserves, while the 11 non-OPEC countries are responsible for 9.7 percent.
However, the IEA’s forecast did not come true, leading OPEC+ sources to claim that it was politically motivated and created to raise US Vice President Joe Biden’s poll numbers.
The direction of interest rates may be another effect of the production cuts.
James Bullard, president of the St. Louis Federal Reserve Bank, stated the following in an interview with Bloomberg on Monday: “The price of oil varies. It’s challenging to track precisely. Some of that might cause inflation and a little bit of difficulty in our work.”
According to traders, there is now a 58.3 percent chance that the Fed will raise interest rates by 25 basis points in May, up from a 48.4 percent chance on Friday, according to the CME’s FedWatch.
According to marketwatch.com, Jorge Leon, senior vice-president of oil markets research at Rystad Energy, wrote in a note to clients that “the anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world.”
Dicker, who was interviewed on Yahoo Finance Live on Monday, has a different perspective.
He added, “I think this gives the Fed a little more speed or heat into cutting again in May and maybe even another cut after that. These are the main tools at the United States disposal to keep oil prices low, and I believe Joe Biden and the United States will employ them.
The Fed’s next move might be influenced by a slowdown in US manufacturing that was reported on Monday. Due to a sharp decline in new orders, activity fell to its lowest point in almost three years in March. According to analysts, tighter credit conditions could cause activity to decrease even more.
All manufacturing PMI (purchasing managers index) subcomponents fell below the 50-point mark for the first time since 2009, according to a survey conducted by the Institute for Supply Management (ISM) on Monday.
A recession may be on the horizon, according to some economists, while others argue that much will depend on the services sector, whose PMI continues to point to an expanding economy.
According to Christopher Rupkey, chief economist at FWDBONDS in New York, “economic statistics in the rest of the economy are not showing convincing signs of a recession.”