Federal Reserve vs OPEC
- Category: Crude Oil
- Date 06-10-2022
Good day,
you probably heard that OPEC is planning to cut crude oil production by 2M barrels a day.
We already covered how the cost of capital and how it affects stocks (particularly growth stocks). Cost of capital is controlled by central banks via interest rates (We will deep dive into this during one of our sessions). You probably heard that interest rates rise around the globe, i.e. capital becomes more expensive to borrow. What central banks are trying to do here is to kill inflation. As capital becomes more expensive, the overall economic activity declines and the demand for goods and services drops. Essentially central banks are trying to kill inflation through lowering consumption. Since everything is a derivative of energy in one way or another, centrals banks are essentially trying to lower energy prices.
Now let’s go back to the OPEC news. OPEC is planning to cut production in order to lower supply of oil to keep oil prices elevated. OPEC is trying to do the opposite of what central banks are trying to do. A battle has started between central banks and OPEC. The question is who is going to win. In my view, the one who controls resources will control the prices in the end. I expect that the announced production cuts will make energy prices skyrocket in the next months. I also expect crude oil to reach its all time high. Let’s watch what happens.
Another related point. By looking at the chart below, you can see what is happening to the US Strategic Petroleum Reserve (SPR). SPR is being drained in order to lower energy prices in the USA. It is reasonable to assume that the current ruling party in the US is using their strategic reserves to „buy votes“ for the upcoming elections in November. The vast majority of US citizens are getting very upset with inflation and high petrol prices - a huge risk for the current administration to lose power in November. But the reserves are intended for emergency situations and not for propping up ratings of politicians…
The SPR will have to be filled up again at some point of time. But where will the oil come from? Definitely not from domestic production in the USA, because no one invests into new production currently…
Best regards,
Alexey
