Supporting the global disinflationary trend has been a big drop in the oil price, which has pushed energy costs lower. There are two factors behind this. The US has become the global leader in oil production which has climbed to around 13.5 million barrels per day in 2024.
The second factor behind the weaker crude price backdrop is the cheating that is going on within the OPEC+ cartel where members are not strictly adhering to production quotas.
In other words, Saudi Arabia is warning that it could “flood the market” with oil supply, which would slash prices and penalize OPEC members who have not cooperated in reducing oil flows including Russia. On this front, Saudi Arabia has reputedly signalled that crude could drop as low as $50 a barrel if OPEC does not commit to reducing oil output. There has been plenty of precedent for this in the past. (I also included this last year in December in our key predictions (please the see the 2023 Baker’s Dozen).
If Saudi Arabia follows through on this threat, we will likely see WTI crude prices break down below key support and fall towards $60. Whilst not a great outcome for overall energy sector, Russia and Iran would likely encounter problems financing their military. For the rest of the world, this could add to the disinflationary trend already underway and prompt deeper rate cuts by the central banks. The energy market therefore bears close monitoring in the month ahead.
This outcome in the crude markets has a decent probability of occurring between now and year-end. Russia has already been selling its oil at discounted rates and with higher production costs. Saudi Arabia, the de facto leader of OPEC and the world’s largest swing producer, has been trying to keep oil prices elevated by pushing for member states to cut production.
According to a recent article in the Financial Times, with international crude now selling in the mid to low $70s, this hasn’t worked. According to S&P Global, Russia is one of the overproducers in OPEC+ with 122,000 barrels of production above its daily quota in July. Iran and Kazakhstan also have breached agreed-upon thresholds. To shift strategy, the FT said that Riyadh now plans to turn on its taps by December.
Of course, oversupply risks in the oil market and price destruction must be weighed up against geopolitical tensions in the Middle East. On this front, Israel seems to be clearly winning the war. The US has advised that all military shipments and bombs (that are being supplied) will cease within 30 days if Israel doesn’t make a more determined effort to dial back what is a one-sided confrontation.
Barring a blow-up in the ME and disruption to supply, some kind of confrontation with Saudi Arabia might be in the wings which could bring forward rate cuts by central banks. This outcome would sustain the bull market in equities and provide a support for another leg higher into next year. We could also see interest rates come down much faster in countries such as Australia, NZ and the UK than is currently envisaged.
Carpe Diem!
Angus
Disclosure: Fat Prophets and its affiliates, officers, directors, and employees may hold an interest in the securities or other financial products relating to any company or issuer discussed in this report. Fat Prophet’s disclosure of interest related to Investment Recommendations can be provided upon request to members@fatprophets.com.au.
Chart Source: Thomson Reuters
