We think OPEC has taken a page out of the Federal Reserve playbook.
Since WTI oil prices fell into the $80.00s, OPEC has been aggressively talking their book (hinting at production cuts). However, they haven't had the same success the Fed has had with interest rates, so they are likely ready to take action. If they cut production by 500,000 it will be more of a symbolic move attempting to shift market psychology as opposed to delivering a fundamental game-changer (they weren't meeting their production quotas anyway). However, if they go with a million-barrel cut, it will take some oil off the market.
We learned in 2020 that OPEC isn't always predictable, but I would go out on a limb to say they probably aren't willing to cut a million barrels at this stage in the game. Doing so is akin to prodding a sleeping bear (U.S. shale oil producers) and it is a slap in the face of world leaders fighting stagflation.
The goal of a cartel is to keep prices high without ruffling feathers so much as to encourage competition and substitution; large production cuts would be short-sighted on their part. The current rally feels like it is vulnerable to a buy-the-rumor-sell-the-fact conclusion in which the upside is limited to the low $90.00s.
While OPEC is attempting to prop prices up, they are working against seasonal tendencies. The price of oil has a habit of finding highs in mid-October and seasonal lows in late January or early February of the following year. Further, we've seen large speculators liquidate the majority of their long positions but they are still net long about 300,000 contracts according to the CFTC's (Commodity Futures Trading Commission) COT Report (Commitments of Traders).
We suspect quite a bit of pain has built up and large rallies will be treated as selling opportunities for those caught on the wrong side of the trade.
The oil market has suffered from two black-swan types of events in as many years. The first being the early 2020 OPEC+ price war and Covid shutdowns. The second was the Russian invasion of Ukraine. Had neither of these events occurred, we suspect oil would have continued in an upward trajectory defined by the trading channel that dates back to 2015.
At the moment, the upper resistance level of that trading range lies near $92.00 and the lower trendline of the range falls at $65.00. The late August break below $92.00 in oil futures put prices back into the noted trading range; we consider this to be the comfort zone that should continue to guide prices should the fundamental backdrop stabilize. If so, the low $90.00s will be a ceiling on any short-term rallies and the mid $60.00s will act as both a target for the bears and offer support to deter additional selling.
