OPEC+ Cuts Oil Production, Threatens Petrodollar and US Global Power
Abraham George Market Musings
With recent volatility in the oil markets, it is a good time to revisit our oil thesis. While I have been persistent in my belief that the lower handle in the 70s for crude (WTI) is a long-term buy, prices dropped to $66 briefly on April 3rd. However, we had a significant break up in the downward-sloping trend line, with prices rising 7% in a day.
The main catalyst for this was that oil-producing countries (OPEC+) decided to cut production by 1.6 million barrels per day starting in May 2023. Pair that with previously announced OPEC+ cuts of 2.6 million barrels per day since November 2022, and that amounts to 4% of global demand. This is significant.
The US doesn't have any say or influence in the matter other than to say "We don't like it." While the move boosted the prices of US energy stocks, it has raised concerns about higher prices and the global inflation picture in general.
Over the past 16 months, US President Biden has drained 40% of the US strategic petroleum reserves in an effort to manipulate the price of oil lower for political reasons, and it did work. However, all of this was temporary. The US will be forced to restock those reserves as prices are moving higher, which will only exacerbate the rise.
The announcement from OPEC came as something of a shock because it took place before the ministers' regular meeting. The perception is that fossil fuels are dead, but the reality is that they still have a long life ahead. OPEC+ produces 40% of the world's crude oil and controls more than 80% of world oil reserves, making them much more united and powerful than at any time in recent history.
According to the Financial Times, the Saudi government was furious when Team Biden announced that they would take their own time in refilling the strategic petroleum reserve. The White House had previously offered reassurance to Saudi Arabia that it would step in to make purchases for its strategic reserve if prices fell. When that did not happen in good time, the Saudis and the rest of the members wanted to show who is boss when it comes to oil.
The Western world has not only ceded its power and leverage on oil in its pursuit for clean energy, but its anti-oil policies have agitated countries that are mainly dependent on revenues from oil production. This has helped China step in and promote a movement to buy oil from OPEC+ in yuan or other non-dollar currencies. Opportunistically, China is filling the void left by the Western world, gaining valuable access to the global oil supply. This is helping China gain influence with countries they didn't have much trade relationships with and diminishing the Western world's influence. It is also a threat to the dollar's role in the world and therefore undermines America's global leadership status.
I continue to be more bullish on oil than ever, and with a fall in the dollar, the price of oil can only be more amplified. It is clear that there is a challenge to the petrodollar. In an undersupplied oil market on the back of the clean energy agenda, the market is underinvested in new production. With a need to replenish the strategic petroleum reserves and OPEC+ determined to do everything in their power to keep prices higher, the only direction prices can go is higher. The only recourse will be if matters became too desperate and the US reversed its policies for new domestic production.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.