OPEC is keeping oil prices below $80 per barrel despite increasing tensions in the Middle East. Here’s why.
The Organization of Petroleum Exporting Countries (OPEC), de facto led by Saudi Arabia, opted for an artificial drop in oil prices on Monday. Previously, concerns regarding the war in the Middle East sent oil prices on a rally in recent weeks.
Brent, the global benchmark of oil prices, decreased 2.2% to $77.02 per barrel. West Texas Intermediate, a similar benchmark for American-traded oil, dropped 2.3% to $72.08. If this trend continues, the price will not break the $80 mark for the foreseeable future.
Last year, Saudi Arabia, OPEC, and Russia enacted a production cut, artificially increasing oil prices. For a while, investors were worried oil might break the $100 or even $150 level, but then prices luckily cooled in the last quarter.
Nevertheless, the outbreak of the Israel-Hamas war sent shockwaves across the oil market, sending prices on a rally again. Another price shock was caused by the recent interventions by the Houthi Rebels in Yemen.
The Houthis have been targeting oil and trade shipments passing through the Red Sea and en route to Israel. This disrupted the entire global trade, with most shipping companies sending tankers around South Africa instead.
Monday’s OPEC decision leaves much-needed breathing room for oil traders. However, it might also be the first step towards a larger bearish market.
A bearish oil?
"If we were just to focus on the fundamentals,” said IG analyst Tony Sycamore, “including higher inventories, higher OPEC/non-OPEC production, and a lower than expected Saudi OSP, it would be impossible to be anything other than bearish on crude oil."
At the moment, the only thing keeping oil prices up is the Houthis’ activity in Yemen. The Russo-Saudi production cut is not enough to keep prices in check anymore.
According to analysts, a production increase by other OPEC members, including Iraq, Angola, and Nigeria, is offsetting the price down.
At the same time, OPEC is preparing for the exit of Angola in 2024, which will reduce the organization’s share of oil production by several percentage points. Angola has the 21st largest proven reserve of oil and ranks 13th in terms of oil exports.
Simultaneously, the United States is ramping up domestic oil production and increasing imports from friendly Canada.
Low oil prices help the United States geopolitically. It allows higher isolation of Russia, which continues funding its invasion of Ukraine through cheap oil exports to China. As long as Russia trades below the $60 price cap (as it is right now), it will lose crucial revenues for its war effort.
How long will the bearish oil last?
