Hey OPEC, Who Is Saying ‘Ouch’ Now? – By Maleeha Bengali (The Street) / May 3, 2023
OPEC members must be scratching their heads wondering why oil is collapsing after they took about 1 million barrels per day out of the market.
After OPEC’s surprise output cutback announcement in March, when Brent crude surged 8% in one day, it now is trading below where it was prior to the cut. At the time OPEC’s Saudi minister said how the cartel’s decision was made to make the hedge funds “ouch like hell,” as they seem to make speculative bets only to the downside, but not when they are to the upside. Today, it seems OPEC members are the ones who may be saying “ouch,” or at least scratching their heads wondering why oil is collapsing when they have taken about 1 million barrels per day out of the market.
I opined back last summer that there was no shortage of oil, but at a time when the global economy was reopening and demand was surging after the Fed’s quantitative easing stimulus, demand shot up in a short window of time, which caught the supply side by surprise. What made matters worse, especially as the world was debating what would happen to Russian oil production, was that OPEC+ was deliberately slow to release all the 10 million barrel per day it cut back in March 2020 at the peak of the Covid crisis. Like a release valve being opened slowly at a time when the thirst for oil was insatiable, prices tend to go up. OPEC along with the US and Russia are swing producers, so any tweak from either of them at a time when there is no margin of error can influence prices to a massive extent.
OPEC+ needs “higher for longer” prices to sustain its future development plans and ambitions for growth in the region. A lot of hype and hope was placed on China at the beginning of the first quarter when it ended its zero-Covid strategy and reopened after being shut down for almost three years. Sell side analysts are still calling for massive demand rebound numbers on a supposed China reopening that the physical markets do not match with the estimates.
