WTI hardly moved from where it started this week, losing just $0.08 to end at $86.79/Bbl. The market weighed several factors, which ultimately negated each other: a strong U.S. Dollar, OPEC+ cutting output for October; signs of weak economic data in China amid a renewed Covid outbreak; and; Putin threatening to cut energy supplies.
The dollar's relative value has not been this high since 2002. A more expensive dollar can cause foreign buyers of dollar-denominated commodities to pay more for the same amount of goods. The USD Index's (DXY – a proxy for USD strength against a basket of six other currencies) rally halted late in the week, but the ongoing strength is likely holding back oil prices.
OPEC+ agreed to cut their output by 0.100 MMBbl/d in October, a departure from a 14-month ongoing plan to bring supply back. Saudi Energy Minister Prince Abdulaziz bin Salman said, "This decision is an expression of will that we will use all of the tools in our kit." Although the first OPEC+ oil supply cut in more than a year is small in volume, its intent might be to show that OPEC+ is keeping an eye on prices and is prepared to act preventively.
The cut was a surprise to the market. Many expected OPEC+ would hold output levels as long as prices remained over $90/Bbl. Also, the supply cut comes at a time when the market is concerned that the EU could impose more sanctions or price caps on Russian exports.
In the near term, concerns about demand have outweighed supply concerns. Oil futures have lost nearly 20% in the past three months and have given up all their gains since Russia invaded Ukraine on a potential global economic slowdown.
China, the world's largest oil importer, has shown signs of more intense economic slowdown, with apparent consumption (oil refining volume plus net imports of refined petroleum) falling 9.7% in July to a two-year low of 12.16 MMBbl/d amid strict Covid-19 curbs. China has 33 cities under full or partial lockdowns resulting in mobility restrictions for nearly 65 million people across the country, and it is unclear when the lockdowns will be lifted.
Despite demand worries, signals from the physical market suggest supply remains tight, and many OPEC countries are producing below quotas while fresh Western sanctions threaten Russian exports.
Putin threatened this week that Russia would stop supplying oil to countries that support a price cap on its energy supplies over its military conflict in Ukraine.
All considered, we believe there is an upside to prices in the short term and the forward curve. We still recommend costless collars for most clients. A collar would allow for a price floor to be set to protect against a price decline and also allow for upside participation if prices realize higher than the forward curve. They do have opportunity costs if prices increase substantially, so talk with us about how to construct a collar that fits your financial goals.