There is an OPEC meeting taking place Thursday, where the organisation is meeting to decide on further delays to the reintroduction of production of oil. To break this down to its most simple terms, stay with me. The meeting was to take place this evening, but was delayed due to travel schedule conflicts. MBS has already arrived in UAE in advance of the meeting.
OPEC have curtailed their production, starting in 2017. The rapid adoption of hydraulic fracking oil production in the US starting in 2000/2004 , produced faster, more efficient (less environmentally safe) ways to produce oil. After the global financial crisis, the US grew to producing 12 million bpd. In 2014 oil prices went from $100 a barrel to $30 a barrel. OPEC had to do something. It started to cut production. Since then, we have had COVID and wars.
Total Continuous Reduction (Cumulative)
As of 2024, the cumulative continuous OPEC reduction of oil production that remains in effect is around 3 to 3.7 million bpd, depending on the most recent adjustments.
This is the ongoing amount of cuts that have stayed in place, without considering temporary adjustments that have been reversed over time (like the 9.7 million bpd peak in 2020). Therefore, while the total cuts made since 2017 are significant, the continuous reduction that is still in place today is around 3 to 3.7 million bpd.
Impact of cuts
In doing so, some OPEC member countries get a bad outcome. They are told that they restrict their production and fall in line- thus curtailing their revenue generating abilities, or leave the consortium and forgo all the benefits of membership, which are many.
The UAE and Saudi are both looking to bring 2-3 million bpd production back. The reason is that they don't want to leave 100 years worth of oil in the ground as we get closer to estimated peak oil demand in 2050. EU current mandates for bans on carbon based engines is for 2035-CRAZY! So you could say that we are entering a complex phase in the oil demand picture.
My personal view is that the EU will bring in this ban in 2035, they will get it wrong, governments will get voted out and there will be rising financial instability as an outcome. They will then roll back on this within 24 months and oil will slingshot from sub $50 a barrel to over $100 a barrel. The reason being is that so many of the marquee large producers of oil will start to divest and recoverable oil will be much harder and more expensive to extract and refine. Thus, bringing price back from the ashes.
The main drivers of price at the moment are
1 China oil demand not bouncing back.
2 Global inventories -They are below a 5 year average at the moment, however there are considered to be 6 million barrels of oil in spare capacity within OPEC at the moment. So this is considered bearish. Spare capacity being the amount of oil that a country or body could ramp up production by, but do not currently have it accessible and online.
This is a changed picture where global spare capacity about 2 years ago was considered to be only about 2 million barrels per day.
Considering all of the above, we also have to lay on top that the US wants to push their already record levels of 13.4million bpd production by +3 million over the next 10 years. So net net- bearish. Drill baby drill!
The only thing OPEC could do now to throw oil price a lifeline is to sustain the cuts to at least June if not to end of 2025. Tonight, if they do not push the cut period further out, we will come down another $5 this week in oil prompt futures.
Seasonal price expectation
In this chart, we can see the average price pattern of oil across any given year. This is back tested data. We can see that the pattern across all 30 years, from Dec 1st is that the market sells down. There are many reasons why this happens, but the chief is that refiners in the US are not buying again until this first week of December. If you are interested in learning more about why they do this and how it occurs every year without fail, do get in touch.
So if we take the historical pattern, rather than trying to think what OPEC will do, we can take a probability based trade. I am looking at the Oil market selling down quite violently this week, to then to a prompt turnaround midweek to next week.
I am a perma-bull on oil.
In the trading plan I have for the week, this is my base case. It will need OPEC to not delay production, OR to reintroduce a smaller amount, OR to reintroduce the production through 2025, with an aim of the 2-3 million achieved by end of year. All pretty bearish. The one thing I will have to account for is what is already priced in? I think the market is not pricing in that they delay cuts through all of 2025. This would be bullish, however there are still problems as outlined above. I think the market could easily, hear OPEC do delay production and we flush out to the downside anyways to get weak hands out. So I will focus on price action and value rather than what the street wants.
In order for me to trade, Im going to need to see the price fail at Q-1 and buyers give up the $67.98 level. Then we are good for handing out sick bags to buyers.
In summary, oil does not need the reintroduction of more barrels back on the market right now. With about 6 million barrels of spare capacity out there in OPEC and with The US now looking to push production up another 3 million, its just too much. All in an environment where demand is overall flinching. It is a heated debate at the moment if global demand decline is the actual story. OPEC and EIA seem to be crossing swords over the matter.
India is set to replace Chinas oil demand through to 2070. Here is a great articleform The Economist on the topic. Worth a read. The projections are for passenger vehicles to grow 4.6 times over this period. Cargo vehicles 6.5 times.
Have fun out there. Trade what is in front of you. Trade whats happening, not what you think might happen later.