According to the U.S. Energy Information Administration (EIA), world liquid fuels production averaged about 100 million barrels per day in 2022. Over the weekend OPEC+ announced that they would cut about 1 million barrels per day out of production to help boost oil prices, which have been hit by surmounting recession fears and supply reentering the market.
So why does a 1% move down in supply equate to a 7% move up in oil prices. It’s because demand for oil has been growing since the beginning of the year. Housing starts, manufacturing, and other important oil using activities have increased on a strong economic start to the year. If that trend continues along with falling short and long term interest rates (falling borrowing rates are stimulative to economies), oil demand should continue to rise. A 7% rally in oil prices is reflective of growing demand while supply shrinks. But this move by OPEC came about because of heightened recession fears after two of the largest bank failures in history, with higher prices being no higher than they were since the start of the year.
The recent announcement by OPEC+ to cut production by 1 million barrels per day has led to a 7% rally in oil prices due to growing demand for oil and a strong economic start to the year. While we may not see another supply shock like we did in early 2022 with the invasion of Ukraine, it’s likely that oil prices will remain range-bound in the face of more supply cuts as global economic activity continues to weaken and interest rates rise.
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