At the beginning of each trading week, before I even glance at premarket levels in stocks, I take a look at three things. First, I look at Treasuries, then the dollar against other major currencies, then crude oil. Only then, when I have formed a base case around global sentiment, do I pay any attention to premarket moves in stocks. Sometimes, though, I don’t even get to stocks before the open, because the price action in one of those markets is so fascinating that it warrants much more attention than usual.
That was the case with oil this morning. Over the U.S. holiday weekend, presumably on the assumption that the lack of U.S. players would result in an outsized market reaction when the news broke, the group known as OPEC+ announced a “surprise” cut in planned oil output for October. It was a surprise in the sense that they had increased production targets for September, albeit by a token 100,000 barrels per day, just last month, but the futures markets clearly didn’t see it as too much of one.
The front-end futures contract for the U.S. benchmark West Texas Intermediate (WTI) crude did rise around 4% after the announcement, but that move reversed late last night and by the wee hours of this morning, crude was trading lower than it had been before the news broke. How can that be? How can oil drop after a cut in planned output by a cartel that controls around forty percent of the world’s production?
There are several reasons for that.
The first is that the surprise wasn’t really a surprise at all. The Saudis and others had been voicing concerns about the prospects for the global economy and therefore oil demand for a while, seemingly preparing for just such an announcement, and allowing markets to price in a change in policy. Then there is the question of whether this is actually a change in policy at all.
OPEC+’s recent moves have not been about price manipulation, as you might expect from a cartel like that; they have been about politics. The small increases for September and a few earlier months was so that the group could tell U.S. and European leaders that they heard their cries for some relief from high energy prices and would do something about it. The cut for October, on the other hand, is a reminder that the group, which includes Russia, still has power, and won’t put up with being pushed around. Message-sending moves like that have their uses for the group and are annoying for everyone else, but they don’t really mark lasting shifts in policy or outlook.
Given that and the fact that output in non-OPEC+ countries is climbing, in an inevitably time-lagged response to crude’s climb to around $130 earlier this year, it is really the demand side of the pricing equation that is driving traders right now. And that is distinctly bearish. Central banks around the world are hiking rates, not just knowing that will slow growth, but actually wanting slower growth in order to tamp down inflation. And as I have pointed out before, their collective reliance on backwards-looking data to tell them when it is time to stop hiking rates means that they will almost certainly be late making that move and will only do so once some damage has been done.
It is hard, therefore, to be bullish on oil demand. And with non-OPEC+ output increasing, tinkering at the margins of cartel production amounts to no more than saber rattling. The risk for crude therefore, remains to the downside, at least in the short-term.
The fact that crude is trading lower just twenty-four hours after what looked like a very bullish announcement from OPEC+ is therefore not really a surprise at all. If anything, it is maybe a sign that the expanded cartel doesn’t have quite the power it thinks it does. The fact is that markets do what markets do and reversing a long-term trend is difficult, even for OPEC+. That is something for which we should all be grateful but beyond that, the weekend’s “surprise” barely rises above the level of noise.
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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Energy Commodities Economy Markets
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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