After the turmoil of 2022 and into 2023, the market has been desperately waiting for either the OPEC put or the Fed put to be activated.
Investors are so used to the buy the dip mentality in general, that they have been secretly pleading for the Fed to cut rates after the brutal rate rising campaign of last year that hit Technology stocks by 60-80%.
Along the same lines, oil investors after having gotten long last year into the Ukraine war as Brent touched highs of $135/bbl., have been waiting for OPEC to take them out of their misery and cut back oil production to stem the decline in oil prices.
Technology stocks have rallied up 18% for the Q1 as the market is convinced the Fed is about to cut rates by three times this year. Well clearly the Fed has not gotten the memo or are choosing to live in blissful ignorance. Oil price has fallen 50% since last year.
The bullish view on oil had been predicated on a lack of spare production capacity, investment capex in oil and a delayed recovery that could see the market end up in a huge deficit in the long term. All valid points but at the end of the day it all depends on what demand assumption you use and therein lies the problem as Wall Street was too bullish last year. Even the China reopening did not help prices to rally, and so the assumptions moved lower as reality sunk in.
The spare production capacity argument is a bit of a paradox. As prices fall, and production is cut, that argument should technically lose ground as the system is not so "tight" so to speak. Brent oil traded around $75-80/bbl. before the war and after all the shrieks of oil running out, did a full a u turn and was trading back at these levels just a few weeks ago.
The US regional banking crisis caused a few of the local banks to go solvent, and this damaged overall sentiment across risk assets taking Brent down to $70/bbl. It was surprising to see OPEC so quiet, especially as they had been so vocal about oil when it traded around $90/bbl. Instead they kept insisting that the supply agreement would remain unchanged. Low and behold as Brent traded below $80/bbl., it was too painful for them to ignore and just last night OPEC (mostly Saudi Arabia and its key members) announced a surprise 1.1 mbpd cut of oil starting from May through till end of 2023. Voila!
Focusing just on short term revenues can be a painful lesson to learn in the long term. Despite China's reopening, the demand pick up did not offset the demand declines in EU and US as the market moved into a surplus. With OPEC's cut, it has now just closed that gap and balanced markets. To do so right before summer demand season can be quite a precious move especially as the system demand picks up as the cooling demand and driving demand tends to be stronger.
Maybe that was its motive all along? We all know that they were quick to cut 10 mbpd back in 2020, but took almost two years to bring them back on line, causing prices to be much higher. They are quick to cut but slow to raise.
For now, they are the swing producers as US Shale is slow to come back, and they may as well reap the benefits given their future funding plans. All eyes will be on the demand for now, but this certainly closes the gap leaving the markets less hedged for any upside demand shocks. Next up we have the Fed. Will they follow suit and give the addict (market) its next opioid (QE) fix or stand its ground?
