- OPEC+ remain committed to a 2m barrel production cut over 12 months.
- Manufacturing orders from China are down 40%. Aus Q3 company profits are down 12.4% quarter over quarter, the most significant drop in over 14 years.
- Markets on Monday remain elevated over positive signalling from the Fed and China’s Central Committee.
Rising tides lift all boats
On Monday, China signalled that some COVID restrictions might be eased early. That caught the wind from last week’s Fed’s indication that the rate hikes might soon ease up. An updraft that is carrying us through Monday despite some not-so-great data prints.
Tumbling manufacturing orders in China (down 40%), collapsing freight container prices (volume down 21% from August to November), and gutting of corporate profits in Australia (12.4% dip from quarter to quarter); however, the market remains buoyant.
Hong Kong’s Hang Seng stock index is up over 2% at the start of the day on Monday, the S&P / ASX 200 trailing behind with a positive start to the week, up by almost 0.5% in the morning trade.
Geopolitics to the fore?
The market is looking past some not-terrible but not-great news out of OPEC+ as they’ll continue to cut oil production by 2m barrels/day by the end of November 2023.
The Brent oil price is creeping back toward the 90 USD/bbl handle as the US Department of Energy (DOE) attempts to close the book on its reserves sales.
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Coincidentally, or perhaps not coincidentally, the 2m bbl/day figure planned by OPEC+ is roughly the difference in the US’s net oil exports v net oil imports in 2021.
At this time last year, the four-week average of net oil and oil product imports was 193,000 barrels per day. Presently the US four-week average is an export of 2,056,00 barrels per day. A swing of 2.25m bbls/day.
US playing both sides
The US recognises it will need something more durable than special reserve sales and short-lived shale production booms to secure its near-term supply. OPEC, aggrieved at the loss of wallet share to Europe and a forced hand in Venezuelan production boost, will be unlikely to play ball on production increases any time soon.
This has opened the door to one of the more remarkable foreign policy developments in 2022: US’s Chevron to return to Venezuela with the reintroduction to Western markets of Venezuela’s oil.
Venezuela’s oil production has dropped almost 2m bbls/day from the early part of this century. Sitting on the largest oil reserves in the world, Venezuela was undone by some impatience in delivering on promised progressive socialist policies. The policies were funded via skimming capital from the national producer, PDVSA. PDVSA’s demise was accelerated by broad-based corruption and poor management that gutted the country’s crown jewel.
The resulting defaults on loans to US producers and the nationalising of foreign assets didn’t sit well with Washington and shut out Venezuelan oil to US Dollar markets. Now the US is being forced, in a decidedly unpalatable direction, to work to get Venezuela’s exports back to levels aligned with their reserves to at least partially secure the 2m barrels/day that OPEC+ will shut out in 2023.
Tightrope in the oil markets
One can infer from the above that we are entering a period of increased volatility in the oil price sector as the two sides square off in deciding how much OPEC+, including Venezuela, can and will produce.
Risk is to the upside as European governments enact artificial price floors in Russian barrels. The Europeans are underwriting call options while being short, and this imperfect hedge will create instability as oil prices rise.
The other side of the coin is a sharp sell-off with little to show for it, and the US Venezuelan détente will likely crumble. That would centre the balance of power back to OPEC+, so only higher prices can secure the new arrangement.
The oil market volatility in 2023 promises to be more of the same, and it will be a challenging time for global policymakers attempting to stamp out inflation.