One of the OPEC’s strongest oil production cut was declared last month in the Austrian capital Vienna, 2 mb/d , straight after a modest decrease of 200 kb/d the meeting before. The Saudi energy minister Abdul-Aziz Bin Salman backed up OPEC’s decision by his fears regarding central banks aggressive interest rate hiking pathway and its negative affect on oil prices mentioning that central banks are rising rates “too quickly” for hitting economies.
In a reactive response, the US announced the release of the last 15 million barrels trench from its SPR April plan of 180 million barrels to cover up for December 2022 demand with the intention of additional releases soon if needed. In parallel to the SPR release, Biden addressed US oil companies (which are entitled to high taxation by the US government) to utilize their oil output for domestic use over exportation, mainly to Europe.
As stated by Rystad energy consulting, upstream oil industry will see the highest profits ever in 2022, with cash flow from exploration and production soaring from $128 billion in 2022 and $500 billion in 2021 to a forecasted $834 billion in 2022. The main contributing factor to these glowing financials is sustained high oil and gas prices. With average Brent oil prices estimated at $111 per barrel in 2022, a Henry Hub gas price at $4.2 per thousand cubic feet (Mcf) and a European gas price of $25 per Mcf, total FCF for public upstream companies will reach $834 billion this year. As per the figures extracted from the international energy association (IEA), due to the OPEC+ 2 million barrels supply cut, oil demand would slow down by 340kb/d YoY inQ4 2022. Further sanctions will be applied on Russian oil, piling up oil shortage to the international markets noting that Russian oil exports fell by 230 kb/d to 7.5 mb/d in September, down 560 kb/d from pre-war levels. Shipments to the EU dropped by 390 kb/d m-o-m, EU countries have yet to diversify more than half of their pre-war imports away from Russia. Russian officials have threatened to cut oil production to offset the negative impact of proposed price caps.
Headline inflation readings point finger to energy prices as the major contributor to the current prices’ spikes which economies are battling back since mid 2021.Lately headline inflation in the US slowed down for the third month to 8.2% in September and retail sales down to 8.2%, recording the second decline from July’s 10%. However, the annual core inflation increased to 6.6% in September, the highest since 1982 from 6.3% in the previous month and the 30-year fixed-rate mortgage broke 7% for the first time since April 2002. Meanwhile the EU has another story of rising YoY inflation to 10.9% in September.
As stated by Glenloch energy consulting, “it is concluded that OPEC production cut was probably undertaken to support oil prices; a strange thing to do in a tight market with an economy heading into recession. Any impact appears to have been short-lived. With the OPEC+ production cuts in place, and assuming that they are extended through 2023, the market looks very tight indeed.
At the time this article is developed, Brent oil recorded the first monthly upward move of an 8% gain in October 2022 after a decline of 4 months, where it gave back 34% from June’s $125/b high price. Apparently, October’s upward performance was a reaction to the OPEC’s oil cut decision and in reliance to the Saudi’s claim of balancing global supply/demand aside to China’s zero Covid policy and its looming effect on global oil demand. Price sustainability around $100/b or to maintain a benchmark at $90/b would require OPEC to secure appropriate supply gap and would drive the cartel to take the required measures considering the FOMC’s November 2nd meeting at which Jerome Powell is expected to sustain the hawkish stream of 75 basis points for a third time in a raw.
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