Forecast for Crude Oil: USD Strength Outweighs OPEC+ Supply Cut

Oct 6, 2022
VOT Research Desk

Key News – Insights and Analysis

Information regarding the significant 2MMbbls/d production cut from OPEC+.

The organization’s announcement of a supply cut of 2 million barrels per day beginning in November 2022 and ending at the end of 2023 at the OPEC+ meeting in Vienna yesterday did not go unnoticed. This is subject to change if circumstances require it.

Brent crude oil expectedly rallied on the back of this announcement with pre-meeting rumors pointing to some form of reduction in supply between 1MMbls/d – 2MMbls/d. It is essential to keep in mind that the majority of OPEC+ nations have been producing significantly less than their anticipated supply levels this year. As a result, the 2MMbls/d cut may not even have an effect on the production levels that some of these nations currently have.

However, significant nations, such as Saudi Arabia, will probably require production reductions. The United States has been attempting to persuade OPEC+ to avoid another cut, which could heighten tensions between the two major oil producing regions, in the event that OPEC+ and its constituent nations adhere to the forecasted output levels. Brent crude is likely to remain above the $90 handle.

Since a favorable outcome could restore Iran’s supply, thereby lowering crude oil prices, the U.S. nuclear deal with Iran now holds greater significance for the United States. The current dynamics could be altered by the EU’s possible ban on Russian oil and price cap, so it will be important to keep an eye out for updates in this regard. Concerns about a global recession have not gone away, which may provide crude oil bears with some fundamental support moving forward.

After Fed officials, Daly and Bostic did not stray from their hawkish outlook yesterday, “Fed pivot” bets were put to rest. As a result, the US dollar also rebounded this morning. While we focus on UK manufacturing PMI data later this morning, oil bulls were not helped by a better-than-expected services PMI print at the time.

Today’s Fed speakers will be interesting to watch to see if they repeat yesterday’s sentiments, which may limit crude upside. As of this writing, 63% of retail traders hold long positions on crude oil, making them net long. We typically take a contrarian approach to crowd sentiment, but given recent shifts in long and short positions, we have settled on a short-term cautious bias.

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