OPEC: Commodity Talk: OPEC’s production cuts have destablised markets not just oil price, says Sreeram Ramdas

What are your first thoughts on OPEC’s decision to cut oil production for the year 2023?
OPEC+ calls this a precautionary move and that it would stabilise the markets, but in reality, this destabilises the markets – not just oil prices. The peaking of interest rates and cooling down of inflation were being priced into the markets until Friday, and this announcement comes at a time when markets were bottoming out and pricing in a shade of positive developments.

When we look at the Strategic Petroleum Reserve that is held by the US, it’s down to its lowest levels since 1983, and we have seen a 50% drawdown since the last time it was up to the brim. This put the US – especially the US, in a challenging spot.

Will this move be able to arrest some freefall in the price of crude?
Certainly. Output cut of an additional 1.16 million barrels per day may seem minuscule compared to the global demand of 99 million barrels per day, but these cuts have a profound impact on prices. OPEC+ commands 80% of the world’s proven oil reserves and 40% of the world’s supply. With the banking crisis and global slowdown, oil prices were trading at 52-week lows prior to this landmark event.

What happens to the demand-supply equation?
We have global institutions now forecasting Brent crude prices at $100 per barrel by the end of 2024, if this is the case, we will be further driven down into a cost-push inflation situation. With interest rates having risen at a record pace, we were seeing some demand and output waning in the western economies, and the central bank seemed to have it nearly under control. Now with this turn of events, we may see rates peaking at a later stage as reflected by the two-year US treasury yields.

What target do you see for US WTI and Brent for CY2023?
$90 to $95 per barrel would be a likely scenario. Again, oil prices are highly speculative because there are several factors driving prices, it’s not just the demand and supply side, but the attitude of the suppliers and global politics.
Do you think this will prove to be a setback for Central banks trying hard to control inflation? Will it have a bearing on the RBI meeting outcome on Thursday?
It would be a hiccup for the Fed which nearly had inflation under control. If you see the Fed Funds futures, the markets are now expecting another 25-basis point interest rate hike in the coming May meeting – which wasn’t the case as of late last week.

India seems to be in a better position owing to strengthened relationships with supplier nations and we do not see this event having an immediate influence on the outcome of this week’s RBI meeting. RBI is expected to raise the rates by 25 basis points in the upcoming meeting.

What advice will you give to traders in crude oil?
The Chinese reopening, recession followed by an early recovery in western economies, lingering uncertainty of the banking crisis, and demand side response to interest rate hikes and several other factors have to be accounted for.
Most importantly, global politics and Strategic Petroleum Reserve (SPR) levels also need to be checked.

Yes, this seems like an arduous task for traders, and fundamentals can be rarely predicted with accuracy when it comes to Oil.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times