Stocks slipped today, enduring modest losses through noon after opening significantly lower. The Dow, S&P, and Nasdaq Composite all fell in response to surging oil prices.
The Organization of the Petroleum Exporting Countries, more commonly known as OPEC, announced a surprising oil production cut this morning. The group (which includes Russia) will slash oil production by an historic 2 million barrels per day. A delegate from the organization confirmed that this cut is from OPEC’s baseline levels, meaning that the real number of barrels removed will total less than 2 million, as OPEC is already producing below the baseline.
The largest ever cut from OPEC came when the group slashed production by 9.7 million barrels per day in response to Covid. Most analysts argued that today’s cut was made in anticipation of a global economic slowdown.
And while that may be true, OPEC’s move this morning was more political than anything else. It’s no secret that OPEC member nations are seeking regime change in the West. Rising gas prices could certainly help achieve that goal, especially in the US with the midterm elections soon approaching.
President Biden responded to the news this morning.
“I need to see what the detail is. I am concerned, it is unnecessary,” Biden said according to CNN’s Chief Congressional Correspondent, Manu Raju.
The White House then issued a formal statement on the production cut:
“The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine,” the statement read.
“In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”
OPEC’s announcement unsurprisingly had a negative impact on stocks. Keep in mind that OPEC can keep cutting production than the US can draw from the strategic petroleum reserve (SPR) to help suppress prices. At some point, the SPR will need to be refilled too, causing prices to rise.
The Biden administration mentioned several weeks ago that it would eventually refill the SPR at roughly $80 per barrel. We observed that such a statement would put a floor under oil at $80.
WTI crude, the US benchmark for oil, is trading at roughly $87.60 per barrel. Brent crude, the European benchmark, just hit $93.20 per barrel.
The assumption was that a recession would drive oil prices lower. In the wake of the OPEC cut, however, we may not see $80 oil again in the US for quite some time.
And if we do? It sounds like the Biden admin will buy every dip at $80, making oil-related ETFs like the United States Oil Fund (NYSE: USO) a very attractive option for traders even as the global economy continues to slow – something that would typically monkey hammer oil lower.
In short, the stage has been set for a massive increase in energy costs, which poses a big opportunity for oil bulls along with equity bears as rising energy inflation threatens to derail the “Fed pivot” narrative.
