High energy costs are directly related to current inflationary pressures. The fight against inflation is closely related to the monetary policy of central banks. And these monetary policies are closely tied to valuations in the financial markets. ANDThis of course affects the prices of risky assets like Bitcoin. In other words, the price of oil is decisive. For the economy and for the markets. And, to understand the swings in the price of oil, we must carry out an analysis of its demand and its supply.
Oil prices have fallen steadily in recent months after peaking in June. We could attribute this fall to a reduction in demand due to the economic slowdown caused by increases in credit costs by central banks. Yes, prices have dropped lately. But that doesn’t mean they’ll keep going down forever.
OPEC +, the Organization of Petroleum Exporting Countries with others included have decided to cut production by 2 million barrels per day to try to raise crude oil prices. We must remember that OPEC is a cartel. The group is led by Saudi Arabia and includes 12 other countries. The (+) sign in OPEC+ refers to countries that are not part of the original group, but (lately) participate in the cartel’s collective plans. In this (+), we have Russia. The objective of this brotherhood is to conspire to fix oil prices by controlling and regulating the supply.
Before the pandemic, the group was quite fragmented. In other words, the quotas were not being respected to the letter. Countries, with the capacity to produce more, produced more. And they were all operating as free agents. This “chaos” increased supply and lowered prices. This setup worked quite well for the most efficient producers like Saudi Arabia and Russia. But it didn’t work the same way for more inefficient producers like Venezuela.
Of course, with the collapse in demand during the pandemic, great pressure was created to curb production. Now, During the post-pandemic recovery and on the eve of a possible global recession, the cartel has returned to its old practices of limiting supply to raise prices.
At the moment, the countries that make up OPEC produce around 30% of the world’s crude oil. Saudi Arabia stands out as the largest individual oil producer within the group with production of more than 10 million barrels per day. Of course, starting in 2016, we have OPEC+. So, Russia (which also produces more than 10 million barrels per day) has to be mentioned as part of this expansion. All these countries together produce about 40% of the world’s crude oil.
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In August, OPEC+ members agreed to cut production by two million barrels a day to less than 42 million barrels. The cut will take effect from this November and represents about 2% percent of global oil supply. The clipping as such is not a big deal. In fact, we must take into account that many countries have not been meeting their quotas. In other words, in practice, this cut is not so significant. In most cases, this reduction in supply is due to the productive incapacity of some members.
However, what is worrying here is this new attitude of OPEC+. I mean, the cartel is closing ranks and returning to its former vigor. And this renewed strength of OPEC +, together with the structural problems of oil production, generate upward pressure on the price of oil. This means that this story is not over yet. Or, put another way, the conditions are ripe for prices to continue rising. It is true that the economic slowdown can cause a fall in prices due to a reduction in demand. Nevertheless, This drop in demand could be neutralized with greater reductions in supply by OPEC+.
US President Joe Biden paid (not long ago) an official visit to the Kingdom of Saudi Arabia. This visit revolved, of course, around oil production. Between photos, smiles and other cordialities, everything (apparently) went wonderfully. The hosts hinted that they would dance to the beat of Biden. However, the development of the facts show the opposite. This last-minute turn toward production cuts rather than increases is ultimately a stab in the sword for Joe Biden. Now, looking back, Biden, during that visit, played the role of the clown.
You don’t have to be a genius to know that OPEC+, for the purposes of its decisions, are not taking into consideration the interests, circumstances or feelings of the main oil importers. That is, in this case, the supplier does not give a damn about the consumer’s problems. The United States, Europe, China and India are the largest buyers of oil. But OPEC+ fights for the interests of OPEC+.
Of course, oil production is not simply blowing and making bottles. There have been many years of disinvestment and this has prejudiced the productive capacity. Exploration has slowed down. Production has decreased. And the number of refineries has not grown. In general terms, infrastructure has not kept pace with the times. In other words, there are physical and structural limits to increasing production. It is not just a geopolitical issue. It is not just a matter of trickery on the part of OPEC+. There is also an issue of productive capacity due to many years of disinvestment.
This raising prices by reducing supply could be profitable in the short and medium term for producers. However, in the long run, this could backfire.. Because energy inflation increases the need for alternative energy and accelerates investment in this sector. Namely, OPEC+, deep down, is slowly annihilating its own market.
What does this mean for crypto investors? It means that it is still too early to declare victory in the fight against inflation. It means that it is still very difficult to anticipate a turn in the monetary policy of the monetary authorities. It means that there will still be a lot of volatility and uncertainty for equity assets. And, naturally, these will be very complex times for risk assets.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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