Oil Prices on the Verge of Important Movements

Oil prices are rising since the beginning of the week. Brent crude prices added 1.1% to $83.30 extending an upside for the fourth consecutive day. Impressive. But, this is where oil prices got to the verge of important technical movements.

Brent prices went down by 7.0% to $79.00 in the beginning of the last week. This is a strong drop. More importantly, prices dropped below the support at $83.00-85.00 per barrel. This was the last stand for oil prices since August. This is the point where crude prices surged above $90.00 per barrel. If this stand fails Brent crude prices could easily dive to $75.00 per barrel, and even lower. 

This is a favorable scenario for the United States to nail down inflation to the 2.0% target. But, this is quite an unfavorable scenario for the OPEC. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman blamed oil traders and speculators in the most recent drop in global crude oil prices. Last time he lashed out on oil traders in May Saudi Arabia announced further oil production cuts pushing oil prices up by 35% in the following five months. OPEC raised expectation for oil demand in 2023 in its report this week. OPEC said current negative market sentiment has been exaggerated, while the demand has been more resilient than first thought. Bloomberg has estimated oil deficit in the Q4 2023 roughly at 3.3 million barrels per day, the record since 2007. Meanwhile, International Energy Agency (IAE) added some notes to a bullish sentiment by raising its demand forecast to grow by 2.4 million bpd against 2.3 million bpd growth made earlier this year.

It is hard to challenge the OPEC and its allies as they may cut down oil output like they did in May. In this case, oil prices are unlikely to drop below $80.00 per barrel of Brent crude, and could recover above $90.00 per barrel. But would OPEC+ do this considering an undisputable slowdown of the global economy and oil demand.

If the record oil deficit is already priced in OPEC+ has to cut production further as the deficit would become lower. The oil cartel and its allies has own limits to cut production. So, it might be time to think about alternative ways to boost prices up. There are few options here. Most of them are related to geopolitical tensions in the Middle East. Anyway, the OPEC+ has to do something to keep prices above $80.00 per barrel of Brent crude.

The United States may face a government shutdown next week. It would hammer American economy and may also negatively affect crude prices. This could be overshadowed by rising geopolitical risks in the Middle East that could bring oil prices above $83.00-85.00 per barrel. Capital inflows into the ETF United States Oil Fund LP (USO) during the last three weeks suggest large investors consider this scenario.