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Home / Increased US, Canadian output keep oil prices low…as OPEC slashes production by 2 million barrels a day

Increased US, Canadian output keep oil prices low…as OPEC slashes production by 2 million barrels a day

2022-10-07  Edgar Brandt

Increased US, Canadian output keep oil prices low…as OPEC slashes production by 2 million barrels a day

Despite OPEC yesterday deciding to cut production by two million barrels per day, this could be offset by increased oil output from the United States and Canada, coupled with a looming global recession early next year, which could see domestic fuel prices come down further by next month.

This is according to local economist Theo Klein, who yesterday noted the Organisation of Petroleum Exporting Countries (OPEC) cut in production represents about 2% of global daily demand.

“We did not see global oil prices react much on this announcement yesterday, giving some early indication that commodity traders are unlikely to push up Brent crude prices. With the economic recessions expected to take shape in the first half of 2023 across the globe, it might be that demand weakens and so the reduced supply won’t have a material impact on global oil prices,” Klein told New Era.

Klein, who is an economist at stock brokerage Simonis Storm, added it remains to be seen whether the South African Rand oil price will continue its decline.

Said Klein: “In recent weeks, we have seen that the drop in global oil prices has overshadowed the Rand weakness, leading to a decline in the Rand oil price, which allows fuel price cuts in South Africa and Namibia”.

He added OPEC and allies led by Russia and Saudi Arabia, together called OPEC+, would have to announce additional oil production cuts to materially increase global oil prices.

OPEC’s justification for the output reduction was that it wants to stabilise prices, which have fallen in recent months as the world economy slows.

The OPEC+ decision marks the biggest reduction by the group since the height of the pandemic in 2020.

“We also see that 233 new oil rigs became online in North America, compared to a year ago. So, there could be an increase in supply from the US and Canada, keeping a limit on oil price gains going forward. However, upside risks to global oil prices include Europe making use of oil as an alternative source of energy as Russia cuts gas supply to the continent – and if the Rand weakens further on, the back of interest rate hikes in the US. The picture is, therefore, fairly mixed, but we are of the view that local fuel prices could see another cut by the end of October,” Klein stated.   


Global oil prices

Klein further noted that thus far, this month, global oil prices have been riding foreign exchange volatility, with a stronger US dollar erasing short-lived rallies in oil prices and making the commodity expensive for investors holding foreign currencies.

During September 2022, Brent crude oil prices decreased from US$92.36 to US$87.96, down 4.8%, whereas West Texas Intermediate (WTI) decreased from US$86.61 to US$79.49, down 8.2% during the same period.

“The global oil market is likely to remain volatile as negative macroeconomic data and expectations of economic recessions weigh on prices on the one hand and fundamentals, where demand exceeds supply remain in place and should be price supportive on the other hand. In addition, oil demand is expected to rise significantly in the upcoming winter season in the northern hemisphere, according to some commodity analysts, especially if Europe is unable to agree on a sanctions package with Russia and needs to use oil as an alternative source of energy,” Klein explained.

Moreover, Caroline Bain, chief commodities economist for the global research firm, Capital Economics, said it was unusual timing for OPEC to slash supply.

“Global oil stocks are historically low and, so far, high prices have failed to materially dent demand,” she added.

Also, Kathleen Brooks, director at Minerva Analysis in the United Kingdom, said the output cut was the “worst case scenario people were looking for” and would weigh on financial markets and raise fears that prices across the globe would continue to rise.

– Additional reporting by BBC News

2022-10-07  Edgar Brandt

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