Is OPEC+ About to Shoot Itself in the Foot?

Today, oil prices reached their highest point in more than a year, prompting investors to wonder how much higher they can go until the parties responsible for maintaining the current price level destroy themselves. In February of last year, as tensions and disputes between Russia and Ukraine escalated and eventually led to war, oil prices reached a multi-year high. Speculators were quite positive on oil prices back then for fear of a disruption in oil supply due to Russia's participation in OPEC Plus.

Many market observers at the time predicted that oil prices would rise over $150 as the price had already flirted with the price point of $136. However, things began to cool off later in the year as the war between Russia and Ukraine did not spread to other countries. Concerns that rising oil prices will undo the efforts of policymakers to lift the world economy out of its gloomy slumber were another blow to the bulls' spirits. Specifically, speculators who had expected an even greater increase in oil prices were left disappointed.

Prices are creeping higher again

Oil prices have begun to rise again, and although it could be tempting to attribute this to OPEC+'s voluntary reduction of supply cuts, especially in Saudi Arabia, there are also other forces at play. One thing OPEC+ has made very plain to a group of speculators is that they need to be exceedingly cautious if they are going to gamble against oil prices: they have prolonged and extended again their voluntary oil supply reduction. Previously quite optimistic about oil prices, Goldman Sachs started to have second thoughts about the likelihood of oil prices remaining over $100 per barrel. However, the bank has just increased its oil price forecast from $93 to $100.

Another factor driving up oil prices is the United States data on its oil inventories. Looking at the recent numbers for crude oil stored at Cushing, Oklahoma, one can see a distinct downward trend. For context, in the previous week's statistics, oil inventories plummeted to 22 million barrels, which is the lowest amount at which to operate. Furthermore, this week's data was 943K barrels lower than the previous week's.

Moving forward

The main cause for alarm is that OPEC+ and Saudi Arabia are dead set on not letting supply exceed demand. Investors were hoping that OPEC+ would reverse course on oil and boost production before injuring itself. After all, we're in a situation where it's becoming more apparent that inflation will be much higher than predicted for a prolonged period of time and that interest rates are likely to be higher for an extended period of time. As a result of these factors, economic growth will remain anemic. And if OPEC doesn't change its strategy and the price does actually go to triple digits, I believe at that time a self-inflecting injury is bound to happen, as investor sentiment is already fragile, and if prices go in the 100 zone again, we could easily see a serious downward shift in economic activity, as central banks will be forced to run their interest rate machinery at full steam again to knock down inflation.

In conclusion, OPEC must rethink its approach and weigh the risks of letting oil prices rise into the triple digits. A sharp rise in prices at a time when investor confidence is low might cause a severe slowdown in economic activity. To combat inflation, central banks would have to raise interest rates, which would have a chilling effect on economic expansion. Therefore, OPEC must make the required changes to avoid doing harm to the world economy through its own actions.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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