Oil eases as the effect of the OPEC output cut wears off

Oil prices eased on Monday, as the effect of OPEC’s output cut is starting to wear off. WTI price slipped, dropping below the $91.5 per barrel level. If the WTI price declines, it may encounter support near $82.1 per barrel, while resistance can be found at the $93.7 per barrel level. 

Global recession fears outweighed tight supply concerns on Monday, as markets had time to digest OPEC’s output cut. Increasingly hawkish Fed rhetoric promoted a risk aversion sentiment, boosting the dollar and putting pressure on oil prices. Aggressive rate hikes stifle economic activity, undercutting oil demand, and pushing oil prices down.

Last week OPEC+ decided on a massive output cut of 2 million BPD starting in November. OPEC performed the largest reduction since 2020 in a bid to raise prices, led by Saudi Arabia and Russia. OPEC+ members strive to reclaim the $100 per barrel key level despite mounting global recession risks. Oil prices have been rising since OPEC’s unexpected decision, and many analysts predict that oil prices will climb back above $100 per barrel before the end of the year. 

The US and the EU have been striving to convince the Saudis to increase oil output and provide some relief to the energy crisis and also to deprive Russia of its huge earnings from oil exports. OPEC however seems to have turned its back on the West. US President Joe Biden hasn’t ruled out drawing down from the strategic petroleum reserves in an attempt to tame rising oil prices.

Oil prices are also supported by fears of further escalation in the Ukraine crisis. Russian President Vladimir Putin has renewed threats to halt all energy exports after western allies agreed to impose a cap on Russian oil prices. In addition, the energy crisis in Europe intensifies, as there were leaks in three major Russian gas pipelines, raising suspicions of sabotage. The cap on Russian oil prices is to be enforced soon and will provide further support to oil prices. 

Oil demand is on the rise, as China, the world’s largest energy importer, is ending lockdowns. The start of the winter season will also signal a rise in oil demand boosting oil prices.

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Written by:
Myrsini Giannouli

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