As oil prices drop dramtically markets await OPEC+ response

By Rhod Mackenzie

The day following the most significant plunge in oil prices within the last year or so, its precipitous fall persisted. Within a couple of days, Brent has dropped to its lowest point since the summer and has lost over 14% of its value from its apex one week ago. The market now anticipates reactive measures from OPEC+.
The sudden and drastic shift in oil market prices have caught many off guard. Prior to the crash on Wednesday - the most significant in the past year - it was widely assumed that the decline in Brent price quotes from their peak of $97.69 per barrel on Thursday to the range of $90-92 was merely a market correction.
   It is understandable that many were swayed by the allure of reaching the significant threshold of £100 and the discussions surrounding its impending attainment.

The preceding surge from levels slightly surpassing £70 exhibited a remarkable performance, and the notable resistance in the £89-90 range had been surmounted, which should have established robust support. Additionally, fundamental factors such as escalating oil demand and its deficit in the tangible market favoured the bullish sentiment.
After the price quotes rose by double digit dollars, a large number of long positions were opened with the hope of a movement towards the round figure or higher. Unfortunately, the buyers, referred to as "pigs" by some stock market analysts, created a canopy that only assisted the bears when there were indications of a change in the fundamental narrative.

First, the notion that the Fed had long been attempting to impress upon the general market public, albeit unsuccessfully until recently, rapidly gained widespread acceptance. The proposition was that elevated rates (previously deemed unimaginable by the standards of the preceding decade) were to endure for an extended period. Consequently, both the US and global economy were expected to experience a severe contraction, which would significantly impact the demand for oil.

Wednesday brought timely confirmation to the bears that the process may have started. The report that seasonal demand for petrol in the United States haddecreased to its lowest point since 1998, caused oil prices to drop by almost 6% within hours.
Yesterday, the swift decline persisted as Brent hit £83.84 per barrel, marking a 2.3% decrease from Wednesday's close and a 14.2% dip from the peak of last Thursday. This is the lowest it has been since August. "When oil prices begin to turn, it happens quickly - particularly when it's a downward trend," commented Rebecca Babin, a senior energy trader at CIBC Private Wealth, to Bloomberg on Thursday. The pace of the drop was also influenced by the surplus of long positions that had been accumulating over the past month. Many of the recent buyers at approaching £100 were uncertain momentum traders who are easily deterred from the market.

However, Brent prices have now returned to the range in which they fluctuated from last November to this August, and new norms are starting to apply.

If OPEC+ leaders were previously dissatisfied with prices in this range, especially those closer to £70, they are unlikely to be satisfied with them now. Saudi Arabia and Russia have expressed their willingness to act decisively if needed, leading to discussions in the markets regarding their future actions.

 Following the recent OPEC+ ministerial meeting, it is unlikely that oil producers will make firm statements in the short term. However, future outcomes will be impacted by fluctuations in stock exchange rates and the state of the physical market.

The 'Bears' contend that deficits are waning, but OPEC recently held divergent views. Nevertheless, if oil prices keep trending downwards, the cartel might pragmatically concur with the bears and abstain from ramping up supplies, notwithstanding surging demand, or perhaps even further decrease them. "Although the fourth quarter marketplace may persist to be challenging, reduced prices imply reduced odds of OPEC relaxing supply curbs," National Australia Bank analysts stated.

This scenario could result in a new surge in stock prices, subject to the oil shortage truly increasing and not diminishing.

Achieving this requires the US economy to remain stable, which is not a given in light of the current OPEC situation. However, Saudi Arabia's announcement with Russia did not indicate that the monthly review of oil supply reduction would not trigger another cut.

"This is a different iteration of OPEC compared to that of 2015," remarked Helima Croft, the head of commodity strategy at RBC Capital Markets, on yesterday's CNBC broadcast. "Should the current selling pressure persist over the next few days and force the price of oil towards $70, I expect OPEC to issue unequivocal statements."