“A steady output for the entire year”
Saudi Energy Minister Prince Abdulaziz bin Salman repeatedly stated that a steady output of crude oil should stay for the entire year to keep markets calm. The opposite happened. On Sunday, OPEC+ surprisingly cut production by 1 million barrels.
The question is why did the organization do such a thing? There could be several possible scenarios. But it is more than clear that Saudis tactics from 2020 are back and announce shocking news during the weekend, when the markets are closed, which provides big volatility right at the beginning of the week.
“I want the guys in the trading floors to be as jumpy as possible,” stated Prince Abdulaziz bin Salman in 2020.
WTI and Brent elevated 8%, leaving an enormous gap at the markets open.
30 minutes chart of CL (Crude Oil Futures contract), source: author’s analysis, tradingview.com
OPEC against sellers
Crude oil has been falling from its top from March 2022, when the price skyrocketed due to the Russian-Ukrainian war escalation. But despite the complicated situation in the world with war in Europe, high inflation, and recession, the price of crude oil touched 12 month low.
According to Commodity Futures Trading Commission, the volume of long positions was at the lowest level in more than 10 years. This raised fear among the members of the Organization of Petroleum Exporting Countries and its allies to keep the downtrend to continue.
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For the countries with the export of crude oil as the biggest part of their GDP, the declining price negatively affects the economy. Therefore the handbrake in the form of cutting the production by 1 million barrels could be the consequence of this fear.
$100 level back in the game?
The way how this situation happened and what could stay behind this decision completely changed all predictions and analyses of big financial houses. A good example could be Goldman Sachs and its renewed, dusted $95 level. In the last 2 weeks, the crude oil price went from $64 to $81 per barrel, which represents more than 26% appreciation. The latest volatility in the energy market tends to count with a ‘magical’ $100 level.
The week has opened with a huge gap and therefore a lot of untraded volumes. Moreover, even in the situation of surprising news, the price corrects as well. Therefore it is good not to look only up, but to support levels too.
POC of the month creates possible support at the level of $76.70 (orange line). And Friday’s POC shows $75.52 as the next possible support. Volatility is enormous and therefore every scenario is possible and it is good to keep money management tight.
Market Profile levels of CL, source: author’s analysis
The tension between the US and Saudi Arabia
Inflation is a big topic all over the world. When the price of crude oil elevated last year thanks to the war escalation in Ukraine, Joe Biden insisted on pumping more oil into the market. The reason was to keep the price of oil down. The energy sector has a big part in the inflation numbers, and the lower price of crude could push down the inflation as well.
The point is that Saudis haven’t listened to Bidens vows and cut the output weeks before the US midterm elections. Despite Biden’s response that there would be consequences, the US did not do anything. Now, when the inflation is higher than last July when Biden’s trip to Saudi Arabia happened, Saudis seem to make another unexpected cut in production. The higher price of crude oil could affect inflation in the US, and further possible Fed’s steps in monetary policy.