The global oil market is hurtling into a new cycle of volatility with opposing catalysts feeding into a highly uncertain outlook. What will be impact after OPEC+ cut production and the G7’s planed price cap?
The price of oil: what happened?
The global oil market is hurtling into a new cycle of volatility with opposing catalysts feeding into a highly uncertain outlook.
On the geopolitical front, the Group of Seven (G7) countries plan to implement an oil price cap against Russian oil imports. The unprecedented move is designed to purchase Russian oil at a discount from prevailing market prices to limit Moscow’s profits to fund its war against Ukraine. According to a US Treasury official, the discounted rates could be regularly revised and calculated separately for crude oil and refined petroleum products.
From the supply and demand perspective, the Organization of the Petroleum Exporting Countries Plus (OPEC+) met on Monday and agreed to a small production cut of 100,000 barrels per day to bolster prices. The group also decided they could meet any time in the following four weeks to adjust production before the next scheduled meeting on October 5.
What will be the impact?
Despite the fact that the oil price jumped after the OPEC+ decision, it's fair to say both moves are more symbolic than a fundamental shift.
The proposed cap on the oil price may place some pressure on Russian export. However, the scale is limited. The G7 members that joined the new sanction include Britain, Canada, France, Germany, Italy, Japan, and the United States, all of whom have already limited or suspended their Russian petroleum purchases. But the most important export destinations for Russia's oil are China and India, which are unlikely to join.
It is important to note that for the plan to be effective, the "discounted" price still needs to be above the cost of production to ensure incentive for its export. In other words, it's still profitable for Russia. Moreover, the trimmed margin to trade with G7 countries will accelerate flow to China and India, which will continue to benefit from a widening price gap.
Similarly, the 100,000 barrels per day (BPD) reduction, which amounts to only 0.1% of global demand, is unlikely to reshape the demand and supply landscape in the oil space. Instead, it's more of a message with the intention to stabilize the price after retreating 20% in the past three months.
Oil price technical analysis
Brent Crude’s descent from mid-June seemly has reached its bottom with the price now moving above the previous trend line. Bolstered by the tailwind this week, the price is now heading towards a 20-day moving average and a 50% Fibonacci retreatment level at $96.73. Once breaking through this hurdle, buyers can expect the price to keep challenging the next resistance, the 50-day moving average sits at $98.36. On the flip side, a drop and daily chart close below the most recent low at $93.04 would engage the six-month low at $92.
According to IG Client sentiment (September 6th data), 76.27% of traders are net-long with the ratio of traders long to short at 3.21 to 1. The number of traders net-long is 2.27% lower than yesterday and 32.29% higher than last week, while the number of traders net-short is 50.18% higher than yesterday and 41.05% lower than last week.
Brent crude oil daily chart
Hebe Chen | Market Analyst, Melbourne
06 September 2022