Energy Spotlight: OPEC locks in slower global recovery with tacky move to boost oil prices; US wants to sue

For the last two months, it’s started to look like the price of crude oil was possibly entering the first stage of covid-era inflation correction. That is no longer. 

This week, OPEC announced a 2 million barrel per day supply cut from world markets, successfully pushing the blood of industry back into the US$90/bbl range. 

The move has irked the US Biden Administration to such an extent that lawmakers have proposed retaliatory legislation in the last 48 hours which would allow the US to sue OPEC. 

The proposed bill has bipartisan support, so while OPEC has thrown oil into a fire (sorry,) at least we can thank them for unifying the Democrats and Republicans. Of course, the American Petroleum Institute hasn’t quite weighed in yet, and when it does, that will carry some influence. 

The USA’s rationale for the legislation is that by deliberately manufacturing a higher oil price, OPEC is effectively allowing Putin to rake in more profits through its still relatively strong oil sales pipeline (as far as we know, of course, assuming Moscow’s self-reported data is accurate.) 

A bigger problem 

The issue with pushing oil back to USD$100/bbl is that it basically guarantees a slower global economic recovery for pretty much every country on the planet. 

Energy costs were, and remain to be, one of the biggest factors determining the global inflation we have all witnessed since 2020, and because of that, one of the key factors that led to the recessionary environments major economies are facing. 

High oil prices have implications far beyond how much it costs road users to fill up 40L. 

A high price of oil makes aviation more expensive, shipping more expensive, trucking more expensive. What we saw last year, and this year, is a high oil price drive diverse types of consumers, large and small, to other sources of fuel. 

Contagion inflation

A high oil price will likely lead to contagion inflation in gas markets, and coal markets.

Coal stocks are one of the hottest sectors on the ASX this year for exactly that reason (one tidbit of the 2021 energy crisis is that the price of wood went up as homeowners returned to fireplaces.) 

All of this spells bad news for central banks and governments doing everything they can to suppress demand (read: inflation) across the world economy at large, if you accept such a thing exists. 

Higher inflation driven by another energy spike would then guarantee banks need to keep rising rates, or keep rates higher, for longer, which in turn would depress share market sentiment for longer, too. Thanks, OPEC. 

Good news for oil traders, energy shareholders, and a dozen supermajors, though. 

Weekly fun fact: NSW has had its wettest ever year on record in 2022. 

A look at the one-week charts for Brent Crude (source: TradingEconomics)

What about energy commodities? 

As of mid-afternoon AEST on Friday 7th October, weekly performance for commodities is as below:

• Brent Crude: up 10.95%

• WTI Crude: up 11% 

• US natgas futures: up 0.94% (monthly performance down -14.32%) 

• EU natgas futures: up 27% (monthly performance down -17.85%) 

• UK natgas futures: up 27% (monthly performance down -19.56%)

• Uranium: down -0.20%

Gas trading Australia has not published October data for natgas spot prices yet, but likely remain within the $6/GJ range. 

Macro Environment remains undesirable 

High inflation means more interest rates, and fears that continued interest rate hikes may trigger a recession continue to dampen sentiment wholemeal.

OPEC’s decision to try and push oil back to US$100/bbl hasn’t exactly helped. 

A conflation of macro factors is at play. A non-exhaustive list includes:

• Central banks worldwide will continue raising interest 

• Beyond the noise, the US Fed will continue tightening 

• The US is in a technical recession; UK set for the same

• Business sentiment in the EU has plunged since July 

• UK consumer confidence at record lows

Price headwinds

• Chinese lockdowns remain the status quo with a new caseload high reported this week according to local media

• Economic sentiment in most major economies from both individuals and entities large and small remains depressed

• It remains to be seen whether industry and markets can absorb oil back in the US$90/bbl range, and what exactly that is going to do 

Price drivers

• Southern Hemisphere summer on the way; Northern Hemisphere winter

• Geopolitical volatility continues to boost gas futures in Western Europe, echoing into US and Asian markets

What to look out for next week 

Saturday 

• Baker Hughes US rig count data

Tuesday

• Australian consumer confidence data (Westpac) 

• Australian business confidence data (NAB) 

• UK unemployment rate 

Wednesday 

• UK GDP growth month-on-month for August 

• US producer price inflation (PPI) data

Thursday 

• US inflation rate for September 

Friday

• Chinese inflation rate (lockdowns are likely to distort this) 

Oz majors 

Woodside (ASX:WDS) one week returns up 10.10% 

Beach Energy (ASX:BPT) one week returns up 9.35%

Santos Limited (ASX:STO) one week returns up 12.68%