🛢Will the oil price come back above 100 USD?

OPEC+ will drive OIL prices?

OPEC+ surprised with its decision to cut its production target sharply, leading to a potential reversal of the downward trend in the oil market. On the other hand, the market is still worried about a potential global recession, and the United States is preparing for the mid-term elections. Given this reality, is there a chance for oil prices to return above $100 per barrel?

How much is OPEC+ really cutting?

OPEC+ surprised with its decision to cut production by 2 million brk per day, but many market participants indicated that the increased cartel was struggling to increase production to previous targets anyway. If we took into account the new November production target and current production then OPEC+ should even raise this production, by about 1.1 million brk per day! However, as we know, many countries are not able to raise production anyway, and those that produce according to the target can cut production by about 1 million brk per day in real terms. Given the EIA's forecast of oversupply of about 1 million brk per day for Q4, with an implied real cut from OPEC+ we may experience the market entering a deficit.Comparison of current production to November production target. It appears that Russia is expected to increase production by about 0.8 million brk per day, while Saudi Arabia is expected to reduce production by about 0.5 million brk per day. Source: Bloomberg, OPEC, XTBIf OPEC+ were to produce according to the target it should increase production by 1 million brk per day. Realistically looking, however, we can count on countries that produce in line with the target to cut production, and the rest to keep production unchanged. In that case, from the current 39 million brk per day on the part of the countries in the agreement, it could make 38 million brk per day as early as November. Source: Bloomberg, OPEC, XTB

The United States is gearing up for elections

The war triggered by Russia has led to quite a change in the global oil market. Prices have risen above $130 per barrel and fuel in the US has even risen above $5 per gallon! This has severely lowered the morale of American consumers. Biden, in order to win elections in Congress for the Democratic Party, had to lower fuel prices. Since April, reserves of about 1 million brk per day have been released. Theoretically, everything is supposed to end in November. Either way, the reserves themselves are at their lowest level since the 1980s, and stocks including reserves are at their lowest level in 20 years!

Since the previous financial crisis, we have seen a very strong negative correlation between oil and stocks including reserves. In fact, we have never seen such a strong divergence. Source: Bloomberg, XTB

What argues for a return of prices above $100 per barrel?

• OPEC+ cuts production target. The real negative impact on global supply could reach up to 1 million brk per day
• US to end reserve release program in November, reducing global supply by up to 1 million brk per day
• Europe starts a ban on Russian crude imports in December, where the real negative impact on supply could reach 0.9-1.0 million brk per day
• China's economic situation does not look as bad as previously speculated, even despite covid restrictions. Private refineries in Shandong are operating at 67% capacity, in line with the 5-year average (in April it was below 50%)
• During the winter period, due to shortages of gas or coal, we may see higher demand for petroleum products for heating and electricity generation. During the winter period, oil demand from this may increase by about 0.7-0.8 million brk per day
• Recovery in the foreign exchange market and a sell-off in the dollar as the end of the US rate hike cycle approaches

What could inhibit a return of prices to $100 per barrel?

• Concerns about an economic slowdown and a real global recession
• A potential nuclear agreement with Iran - here Iran could increase production by as much as 1-1.5 million brk per day. However, the U.S. elections are less than a month away, and a divided Congress after that is unlikely to increase the chances of an agreement
• All countries in OPEC+ are producing in line with production target
• An end to the war in Ukraine, which could delay or even eliminate the entry into force of some sanctions on Russia or the price cap imposed by the G7
• Further strengthening of the dollar in response to possible problems with fighting inflation

What's next for the price?

The price of oil has finally broken out of the downward channel it has been in since the middle of the year. At the same time, it maintains an all-time post-pandemic upward trend. Prices are not expected to fall below the $80-85 per barrel level, as this is where prices are balancing the budgets of most OPEC+ countries. In addition, at $75 per barrel, the US government wanted to start replenishing reserves. At the same time, the level of $100-105 per barrel is not a level that can cause a destruction of demand.

In addition to fundamental factors, it is worth paying attention to the dollar, which is an important factor for building short-term volatility in the commodity market, including primarily oil. Source: xStation5