Brent Crude is above $88, and West Texas Intermediate Crude Oil is currently trading above $85. $100 could be the next stop in the uptrend, but it’s OPEC that holds the key to crude oil’s pricing future right now.
Oil prices are in the midst of a strong two month price rally thanks largely to a resilient global economy and OPEC production cuts. Russian production cutbacks have also added to the recent strength in oil prices, but the reality is that Russia hasn’t cut back on production voluntarily, it has its own war related issues that affect its ability to produce and export oil.
Traders should watch OPEC carefully because it is OPEC and the extended oil producing group known as OPEC+ that will ultimately determine where oil prices head from here, at least in the near term, meaning the next several months. So long as the global economy avoids recession, oil demand will remain robust, despite China’s weakening economic growth forecasts.
What really matters is the view of OPEC’s economists, a venerable group of highly competent analysts that keeps close tabs on world oil demand – demand that ultimately hinges completely on the health of the global economy. It is very important to understand that OPEC does not set production quotas based upon the price of oil – OPEC’s goal is to keep the supply and demand of oil in balance, nothing more. This is the key to understanding oil prices (at least from OPEC’s point of view).
If OPEC continues to extend its one-million barrel plus per day production restraint, led mostly by Saudi Arabia, it means that OPEC’s economists are not yet convinced that the world will avoid recession and the resulting decline in oil demand that could come with a global economic contraction.
The key is understanding that OPEC may see an economic contraction on the horizon, and thus may continue withholding oil from markets, but until the contraction actually occurs, oil markets will be imbalanced and oil prices will continue to rise. If OPEC resumes normal production and abandons the current production cuts, it would signal both an upbeat view of future global economic activity from OPEC’s point of view, and it would likely signal an end to the current uptrend in oil prices as well. Right now, all eyes should be focused on OPEC and what it decides to do with production quotas in Q4. Barring an unforeseen Black Swan event, it’s OPEC that will determine the future of oil prices for the rest of 2023.
