Over the weekend, main members of the OPEC+ group, Russia and Saudi Arabia, announced they would cut crude oil production further than announced in April when the entire group agreed to curb production in the face of falling oil prices. The market reaction to the April announcement was sharp, with crude oil prices rising to around $10 a week or so after the announcement, reaching a high of just over $83.50 per barrel, but without fireworks (7 Please pardon the announcement on May 4). reference).
Immediately after this breaking news, WTI futures (CL) rose slightly from just under $70 to close to $71.70, but the gains were almost immediately reversed and the market has remained within its formed range ever since.
Given the importance of both Russia and Saudi Arabia as suppliers to the world market, this is quite surprising. Why are oil traders shrugging, and what does that mean beyond the oil market?
First, it’s complicated. Most people, and of course myself, wish there were easy answers to these questions, but they rarely are. Most “amazing” things that happen in the market usually happen for a combination of reasons, and this one is no exception. There are multiple forces at work here.
Some feel that cuts in Russian output don’t make much sense, given that much of the world is looking to move away from Russian oil anyway. Moreover, while some US analysts are beginning to believe that a so-called “soft landing” after rate hikes is on the horizon, the outlook for the rest of the developed world as a whole is less optimistic, with data showing that Slowdown in both Europe and Asia. And the biggest impact of rate hikes will be on the oil-dependent manufacturing industries in these regions rather than on technology and service industries, exaggerating the impact on oil markets.
The long-term outlook is also not good. Gasoline and diesel are still the biggest uses of oil so far, and this week’s output from both Tesla and Rivian reiterated that the market is inexorably shrinking.
In addition, there is also a bearish factor on the supply side of the pricing equation. Filtering the news through political bias on either side of the divide might lead you to believe that US oil production is now collapsing, or will soon collapse. This just shows how political bias can change the way you look at market-related things. If Joe Biden and the “radical left” were really at war over oil, then they were surprisingly powerless at it. U.S. output has increased consistently since Biden took office and is now approaching pre-pandemic levels.
US crude oil production
Therefore, despite serious doubts about the demand outlook from the second half of this year onwards, supply from the world’s largest oil producing countries is increasing. It’s no wonder, then, that announcements of supply cuts by two producers, whose demand is dwindling due to invasions of neighboring countries, did not have a lasting impact on oil prices. But what does this mean for investors with little involvement in the oil and gas industry?
The United States is the most important economy in the world and has a huge impact on the global economy, but it is still affected by conditions in other regions. If oil traders are correct, a sharp slowdown in global economic growth would have an impact on corporate profits and, by extension, stock prices. U.S. economic resilience may be enough to make the global downturn less severe, but U.S. stocks are worth about 20 times their long-term average, versus 30% of their 10-year average earnings. It is believed to be more than double. , anything that is not perfect will cause backlash.
Historically, oil prices have been a very good indicator of upcoming global problems. For example, before the US stock market in 2008, the S&P 500 index turned down, and in 2020, the S&P 500 index hit a high in early January versus mid-February. Lack of upward pressure in response to rate cuts by Russia and Saudi Arabia. Monday’s oil price report, while not as weak as it was then, shows plenty of downside risks to the oil market, keeping stock investors on guard for the next month or so. There is a need to.
