When it comes to oil prices, there is only one question that comes to most investors’ minds, and that is: are the $100 per barrel days long gone for oil prices? Most traders are asking this question because of the recent heightened geopolitical tensions in the Middle East caused by the ongoing conflict between Iran and Israel, as well as Israel’s war against Palestine, which has led to Israel losing many of its allies and tarnishing its reputation. Simultaneously, traders have been closely monitoring the actions of the OPEC cartel, particularly its pursuit of $100 per barrel in relation to its voluntary oil cuts. Despite the fact that none of these events have been able to push oil prices higher or close to the $100 mark, the question for traders is now: what is the path of least resistance for oil prices?
Background
Oil prices experienced a rapid increase when they crossed the $100 level on the back of Russia and Ukraine’s war. Due to Russia’s significant role in the OPEC+ cartel, the war caused significant volatility and increased traders’ nervousness. The US and its allies introduced sanctions against Russia, leading to a rally in oil prices. In addition, the OPEC cartel’s close monitoring of oil supply and demand in the aftermath of the COVID crisis significantly contributed to oil prices, pushing the prices of oil contracts below zero for the first time in history. The oil cartel unanimously decided to take strong action and send a clear message to market players that such an event would never occur, as they would take all necessary measures to maintain supply under control. They implied that they would tighten the oil supply taps if demand adversely influenced them. Since that event, they have repeatedly extended the voluntary cuts to artificially raise prices, despite the fact that the oil demand equation hasn’t improved significantly. I say this because we haven’t seen the same level of growth in China as we did before the COVID-19 pandemic. In addition to this, China is a very important part of the oil demand equation.
The Problem
The current issue with the oil demand equation is the rise in inflation. Record-high inflation, which has come down from its ultra-high levels but is still well above the desired levels of central banks, has slowed the world’s economic engine. If we look at the GDP growth in the US, the UK, the EU, or even China, the numbers continue to paint a very pessimistic picture. Central banks are optimistic that higher interest rates will bring inflation lower, and as a result, they can normalise their interest rates. The process of normalising interest rates will help the world’s economic engine pick up more steam, which would help oil demand.
Tackling supply issues
In order to address the ongoing lower economic situation, the OPEC group, led by Saudi Arabia and Russia, announced a number of production cuts. Only recently, on June 2, did both countries take the spotlight again when they announced a prolonged and complex period of cumulative production cuts well into 2025. The announcement temporarily boosted oil prices, but traders quickly scrutinized the details, revealing that OPEC+ members will have the ability to add more barrels to the market starting in October, potentially leading to a significant increase starting next year.
Now, smart money knows that OPEC’s moves are very much market dependent, which means that they cannot afford to not hit their level of revenue by just cutting production—meaning if the price continues to fall, there could actually be a supply war where OPEC+ countries would fight for the lion share and produce more in order to meet their revenue target. On the other side, the optimistic factor may actually keep prices where they are while production cuts remain in place or increase by only a small margin.
What would help?
The only two factors that could help oil prices go above $100 barrels are serious disruption or threats to disruption of oil prices, and this could be in the form of further anchored geopolitical tensions where Saudi Arabia, Russia, Iran, or the US are directly involved. Alternatively, we see a dramatic increase in demand following a steep decline in the ongoing higher inflation situation. Apart from these two major events, there are other smaller events that could also potentially impact oil prices, but in my opinion, they are not strong enough to push oil prices higher.
The Path of Less Resistance
The immediate to long-term move for oil prices continues to remain on the downside, and this move is more than likely to be gradual as the OPEC cartel will not allow prices to go in free fall. It will be interesting to monitor the levels displayed on the chart below.
