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OPEC+ Remains The Price Maker

Yesterday OPEC+ announced an additional cut of 1.14 million barrels per day, resulting in crude oil prices increasing by 5%. This cut will be through the year and even Russia announced that it would extend its cut of 0.5 mn bbl/day. It makes a total cut of 1.64 mn bbl/ day post the December cut announcement.

More than one reason might have led to such a decision. The first of them was that even though the price remained below $80/bbl for most of the January-March quarter USA did not refill its Strategic Petroleum Reserves. Instead, they announced an additional release of 26 mn barrels during the April-June quarter. In addition, even France released some of its SPR during the quarter. This has resulted in more supply than estimates.

Another reason is that data from China reopening was not as estimated resulting lowering of the demand estimates for the year. In addition, a banking crisis would impact global growth and eventually impact global crude demand.

These and other technical reasons such as Russian petroleum products being unable to find buyers and getting stranded in tankers do not provide a good outlook.

The actions might justify the demand and supply dynamics but they open the global economy to two new risks.

The first is that Russian crude oil is not linked to Brent prices with a $20/bbl discount but if prices remain the same or higher from here then May or June loading would be a problem as the price would breach the price cap.

The second problem is that as prices remain higher than in the first quarter this would impact the inflation trajectory, especially in the second half of the year. And this might make the interest rate trajectory shift higher than estimated right now.

Thus, the volatility between the financial markets and physical markets will remain for quarters impacting the economic outlook.


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