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A regular Rigzone market watcher looks at the OPEC+ surprise cut, talks oil demand is price inelastic, oil market volatility and more. Read on for more details.
Rig zone: What were some market expectations that actually played out over the past week and which expectations didn’t?
Barani Krishnan, Senior Commodity Analyst at uk.investing.com: Demand for oil, at least on the US front, was higher than expected last week. But the real surprise, and there’s no way that phrase could have been better defined, was OPEC+’s decision to add 1.7 million barrels a day to its announced November cut of 2.0 million of barrels per day.
Rig zone: What were some market surprises?
Krishnan: At the heart of it, the latest OPEC+ production cut by Saudi Arabia had enough firepower to push crude oil prices to explosive new levels around $100 a barrel. This is on paper. In reality, however, there is something more powerful: the economy.
The biggest news on oil demand since the start of this year has been Indian and Chinese purchases, spurred by Russian oil made cheaper by Western sanctions. The Saudis, as the dominant force in OPEC+, want a piece of that demand pie. But the Chinese and Indians will likely slow their buying once prices start to rise from the latest production cut.
There is talk that the demand for oil is price inelastic, but the reality is like everything else, higher prices will slow energy consumption. India and China have bought enough barrels to keep them going for the next six months or so. It could be around September when they ramp up the big purchases again.
The price of oil cannot be sufficiently inelastic over the next six months, especially if a global recession comes. It’s like what Don Corleone says to the Vatican in The Godfather 3 when he’s asked to send a huge check to restructure the church. “Your sins will be forgiven, Don Corleone,” he told him. The Godfather replies: “Don’t overestimate the power of forgiveness!”
Saudi Arabia’s Crown Prince MbS has over-committed to the Kingdom’s development and now needs at least $80 a barrel to fund it for the next five to eight years (not even counting the inflation). China is still dragging its feet on new purchases. The Saudis are pushing their luck with the global economy, hoping the world will foot the bill for Saudi Arabia’s redevelopment. There are limits to everything.
The 2008 financial crisis and the speed with which the market retreated from post-Ukraine highs of $140 show how resilient oil prices can be when times get tough for ordinary people. Oil’s inability to rally beyond the highs announced last week, despite bullish US demand data, is clear evidence of this.
Rig zone: What news/trends will you be waiting for this week?
Krishnan: Volatility that could cap crude’s $80 highs.
To contact the author, please send an email andreas.exarcheas@rigzone.com
