OPEC meeting a bracket for economic recovery

OPEC meeting a bracket for economic recovery

05 July 2021 from Mikael Syding

On 1st July, OPEC held a meeting with other major oil countries to discuss production quotas and strategies to maximize oil exporters' long-term profits and power. As always, it is a tug-of-war between countries that need maximum money immediately, such as Russia, which wants to increase production now that the world is reopening after the Covid restrictions, and traditionally more cautious countries such as Saudi Arabia. The latter above all wants to avoid such extreme price crashes as may be the case when optimistic production quotas face a weaker-than-expected economy.

Another third, now typical concern, is to happen to attract shale oil producers again with high oil prices, because once these are in place, the extra supply will lead to lower oil prices in the long term, which harms all players in the oil industry. This year, however, no one seems to be afraid of "demand destruction" that high prices create problems for oil buyers so they permanently find other ways to keep their business going. Rather, everyone, except perhaps Saudi Arabia, agrees that the economy is now gaining momentum in earnest. However, the world's need for more oil after the pandemic may be more than met by Iran alone if it agrees better with the current US president than the previous one.

The oil price has risen almost continuously since the bottom of the pandemic in April 2020. The WTI price on 1 July reached over 75 USD per barrel, the highest level since 2018 and before that. But when WTI sets its local price records now in early July, the copper price peaked in mid-May. Both indicators are a bit "dirty", ie they signal several different things, e.g. inflation, geopolitics, production quotas, business cycle and conversion to electric motors. Together, the picture is still very clear; the economic upswing is for real, with both growth and inflation, as well as even a slight giggle from the super pigeons at the world central banks. Thus, I think one can expect that the cycle will continue to strengthen and that the copper price will gain new momentum soon, even if the oil price would temporarily drop a bit after the OPEC meeting.

The iron ore price also peaked in May after a fantastically good year. The aluminum price shows an almost identical pattern, too. The recoils since then for the mentioned metals, including copper, look in my eyes only healthy, ie they constitute highly temporary concentrations of power in a steadily positive trend. If, for example, the OPEC meeting were to mean slightly higher production quotas than expected, with falling oil and metal prices, I would see it as a good buying position. Higher quotas in this situation really only show that oil producers view the business cycle positively. The economic strength has already been confirmed in practice by both metals and oil, and copper is also given an extra boost by the electrification hype. Sure, keep an eye on the reactions to news from OPEC +, but above all be ready to be quick to buy any rebounds in cyclical stocks and commodities.

@Mikael Syding

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16/09/2021 16:56:36

 

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