Oil Falls to the Bottom of the Trading Range

The biannual OPEC meeting was supposed to occur on Sunday, November 26. The gathering of OPEC ministers, including consultation with Russia, establishes production policies for the coming months. Last week, the cartel decided to push the meeting to Thursday, November 30, indicating no consensus over output quotas for the coming year.

Saudi Arabia has shouldered the bulk of 2023 production cuts. Riyadh is likely looking for other cartel members to contribute more for the coming year or stop cheating on their quota output levels. The news of the delay sent oil prices lower on November 22. Nearby January NYMEX futures fell to $73.79, a slightly higher low than November 16 when they reached $72.37 per barrel.

OPEC aims to achieve the highest possible petroleum price that balances supply and demand fundamentals. Since the cartel controls the supply side, production quotas are critical. The recent selloff and prices below $80 per barrel could be an opportunity to load up on oil-related investments, as the cartel could eventually agree to a strategy that lifts prices over the coming months.

Crude oil prices have been in a bearish range since late September

• NYMEX crude oil futures have made lower highs after trading above the $90 per barrel level in late September.
• Weak Chinese demand, seasonality during winter, and increased U.S. production to 13.2 million barrels per day have weighed on the price.
• While the short-term trend is bearish, the medium-term path of least resistance remains bullish since the early May 2023 low.

OPEC- Conflicting goals

• Saudi Arabia requires $80 per barrel to balance its domestic budget.
• Russia needs the highest price possible to fund the ongoing war in Ukraine.
• Iran and other OPEC members seek to sell as much petroleum as possible and, together with Russia, could be discounting sales to China.
• Saudi Arabia would like more contributions from other OPEC members to support prices.
• The biannual meeting’s delay indicates no consensus.

The U.S. waits for lower prices

• The U.S. Strategic Petroleum Reserve fell from over 600 million barrels in late 2021 to 351.3 million in late November 2023.
• SPR sales weighed on oil prices in 2022 and 2023.
• The U.S. target range for repurchasing oil is $67 to $72 per barrel. Despite price weakness, the U.S. has only repurchased 4.0 million barrels over the past months.
• Further selling could encourage more U.S. buying.

The case for higher prices

• Economic recovery in China would increase global petroleum demand.
• The U.S. repurchases could put a floor below the oil price at the target $67-$72 range.
• Seasonality has weighed on oil demand. In early 2024, the price could rise as the driving season approaches.
• The wars in Ukraine and the Middle East are fundamentally bullish for oil prices.

ETFs to consider on the dip

• USO and BNO are the United States WTI and Brent crude unleveraged ETFs that track the NYMEX and ICE WTI and Brent benchmark prices.
• UCO is the leveraged ETF product that turbocharges USO’s performance. Since UCO uses options and swaps to create the gearing, it can suffer from time decay if NYMEX crude oil prices decline or remain stable.
• XLE and VDE are U.S. oil-related ETF products that tend to move higher or lower with NYMEX crude oil prices.
• ERX leverages the performance of XLE and VDE.
• The ETFs’ performance reflects short-term price action in the crude oil market.
  
  
  

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!