OPEC+ Gets Hoisted by Its Own Petard
“Hoisted by his own petard” is a Shakespearean idiom, coined by the great bard in Hamlet. It means to be hurt by one’s plot intended for another, a term that derives from explosive devices hoisted over fortress walls during Medieval battles. These bombs often went awry and destroyed the assailant.
Which brings me to the Organization of the Petroleum Exporting Countries and its allies (aka OPEC+). Despite the oil cartel’s efforts to jack up crude oil prices by curbing production, oil prices have been plunging. That’s good news for inflation fighters and the overall stock market, albeit a headwind for energy investors.
Saudi Arabian Crown Prince Mohammed bin Salman Al Saud (known colloquially as MBS) and Russian President Vladimir Putin are adept at dictating to their respective citizenry. However, as leaders within the OPEC+ cartel, they’ve been less successful at dictating to the global oil markets.
OPEC+ announced in April that they would cumulatively slash crude oil production by another 1.16 million barrels per day (bpd) until the end of 2023. The cuts started this month.
OPEC+ last October had agreed to a production cut of 2 million bpd from November until the end of 2023; Russia’s share of that pullback amounted to 500,000 bpd. The new output cuts that started in May come on top of these existing reductions.
The cuts are designed to boost crude oil prices, as a counterbalance to recessionary forces that destroy energy demand.
The U.S. and its allies in the developed world, especially Europe, had been lobbying OPEC+ to throw open the oil spigots, to bring down energy prices and thereby mitigate inflation. MBS and Putin, the most assiduous lobbyists within the cartel for the cuts, essentially gave the West the middle finger.
Read This Story: OPEC+ to West: Drop Dead
However, OPEC+ has been steadily losing clout in the global oil markets, as trading in the world’s most valuable commodity increasingly becomes fractured. The rise of regional oil markets has disrupted the political order. What’s more, OPEC+ members habitually cheat on their quotas.
The biggest factor weighing on crude oil prices is the global economic slowdown. Instead of going up, as OPEC+ intended, oil prices have sharply fallen (see chart).
The plunge in crude oil prices is a significant deflationary trend and further bolsters the case that the U.S. Federal Reserve will pause its interest rate hikes in June.
Ironically, one of the biggest cheaters on the OPEC+ production quotas has been Russia itself. The Russian war machine needs vast amounts of revenue to keep fighting in Ukraine. Despite the erroneous assertions of pro-Putin apologists, the Russian economy has taken a beating from Western sanctions, although not as badly as the West would like and not enough to dissuade Putin from his invasion.
Consider this: The U.S. has now surpassed Russia as the main supplier of crude oil to the European Union, at nearly 20%. Before Putin launched his war, Russia accounted for about one third of the bloc’s imports, while the U.S. came in at 13%. Putin has permanently lost Europe as a major energy market.
Accordingly, the Kremlin’s energy revenue has plunged by nearly 50% year to date, compared to the same period in 2022. Russia’s budget deficit is ballooning and the country’s “brain drain” of talent continues apace.
Russia is a petro-state and right now it’s desperate for oil revenue. Reports recently have surfaced that Russian crude shipments remain robust despite sanctions, embargoes and quotas. April oil loadings from Russia’s Western ports are on track to hit their highest levels since 2019, at more than 2.4 million bpd. Apparently, there’s no honor among kleptocrats.
Also dampening oil prices are the efforts of central bankers to combat inflation. The Federal Reserve’s policy-making Federal Open Market Committee (FOMC) on Wednesday announced a rate hike of 0.25%, bringing the federal funds rate to a range of 5% to 5.25%, the highest level in 15 years. It was the 10th consecutive rate hike since March 2022.
Equity markets and crude oil prices fell Wednesday on the Fed’s decision, amid the rising odds of a recession.
The main U.S. stock market indices extended their losses on Thursday and closed sharply lower as follows:
- DJIA: -0.86%
- S&P 500: -0.72%
- NASDAQ: -0.49%
- Russell 2000: -1.18%
The S&P 500 index has struggled in recent days to break out of its narrow trading range and overcome resistance at 4200. The inability to breach this level is a bearish technical sign.
The major culprit for Thursday’s slump was further turmoil in the banking sector. Shares of PacWest Bancorp (NSDQ: PACW) plummeted more than 50%, after a report came out that executives were considering a sale of the troubled bank.
The shares of other regional banks declined across the board, putting the phrase “financial contagion” back into the headlines. The benchmark SPDR S&P Regional Banking ETF (KRE) fell 5.45% Thursday and is down nearly 35% year to date.
These recessionary signals, together with the inability of OPEC+ to push up crude oil prices, will make it easier for the Fed to pause. It’s also favorable news that several other key inflation indicators (e.g., shipping costs, cargo backlogs, and housing prices) are falling as well.
Inflation has peaked and will continue to decline throughout 2023. The end of the Fed’s tightening cycle is near, no thanks to Moscow and Riyadh.
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John Persinos is the editorial director of Investing Daily.
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