Oil price tanks despite OPEC+ maintains production cuts

Despite Saudi Arabia and Russia announced to maintain their oil production cut until the end of the year in this week's OPEC+ meeting, concerns regarding the deteriorating economic environment seem to have taken precedence, resulting in a notable drop in energy prices to below $90 per barrel—a decline of over 9% in just one week.

Oil prices witnessed an 8% surge in September alone and a 29% increase throughout the third quarter, primarily due to the joint efforts of Saudi Arabia and Russia, who decided to reduce their daily supplies by over 1 million barrels from mid-year, leading to the fastest depletion of global inventories in years.

However, the market's reaction this week seemly suggests that the rally may be losing steam, with attentions shifting elsewhere. It's not unlikely that the demand side of the market is exploring alternative options in response to soaring oil prices. Meanwhile, the prevailing narrative of higher and more prolonged interest rates is bringing the possibility of a recession back in sight. Both of these scenarios would weigh on the outlook for oil demand.

Nevertheless, it may be premature to declare the end of the rally, given the ongoing constraints on oil supply. According to the EIA Petroleum Status Report released on October 3rd, crude oil stocks in the US declined by 4.21 million barrels in the week ending September 29th, marking the sixth week of drawdown in the last eight weeks. Furthermore, on a global scale, the International Energy Agency has issued a warning that the production cuts implemented by these two major oil suppliers could lead to a "significant supply shortfall" by the year's end.

Meanwhile, as the northern hemisphere enters its winter season, historical patterns indicate an increase in demand for heating oil, which could further intensify the tightening of global oil stocks.

The next OPEC+ meeting is scheduled for November 26th, when all 23 OPEC+ nations will gather to discuss their outlook and plan for 2024.

Brent crude technical analysis

On the daily chart displayed below, the price of Brent crude has convincingly breached the trendline dating back to June and is currently trading below the 20-day moving average.

In the short term, the level of $87.53 is expected to play as a critical resistance point, as it previously served as the peak for both April and August. Conversely, recent losses may lead the price to seek support at $85.04, and a further pullback from that point could shift attention towards the August low, around $82.69, coinciding with the current position of the 200-day moving average.