OPEC+ are high fiving each other and strutting around like Brutus “The Barber” Beefcake
What just happened? The 1 million barrel-a-day output cut the Saudis assigned preliminarily just for July was exacerbated by Russia also pledging export cuts of 300,000 barrels per day. More significantly, on Tuesday they announced both cuts extending through the end of the year. That’s right, the Penguin and the Riddler have combined forces and Batman and Robin need to head for the Batmobile. With inventories rapidly declining from week to week, energy traders are taking notice. The cuts are real, and they are spectacular. As the world increased its oil consumption, topping 103 million barrels per day, OPEC+ is putting fewer barrels onto the market. Since July 1, prices have increased by about 20%, with NYMEX diesel up over 30%. Brent futures closed Friday at $90.65 a barrel, while WTI finished the week at $87.51 – a 9 month high.
Higher energy prices will increase input costs for almost all goods and services. By the way, all of this also contributes to inflation, and these numbers will be coming out in the weeks ahead which means that the central banks may not take their foot off the gas when it comes to easing up on interest rate increases. OPEC+ is doing the Fed’s job for them. Of course, hiking interest rates would just be adding insult to injury, since increased energy costs will throttle consumer spending anyway. It’s like doubling down. The soft landing that everyone was recently cheering for may hit a bumpy runway with these higher oil prices.
Why did the cross-eyed teacher get fired? Because he couldn’t control his pupils. Not to be outdone, OPEC+ has crossed the line over to irrational exuberance. Their misguided logic of squeezing the market with production cuts to force up prices is fool’s gold. They must be thinking that their thumb on the scale mimics the “Magic Fridge” in the Bud Light commercial. It just doesn’t work that way. If you keep forcing prices up, pretty soon people will start selling peanuts outside of the ballpark and the fans will buy them there. For now, the leaders of OPEC+ are high fiving each other and strutting around like Brutus “The Barber” Beefcake, but sooner or later they are going to end up like the running and barking dog who ends up catching the car. Then you have to eat a big serving of “now what?”. Ever since Adam Smith touted the invisible hand of the market, time and time again we all learn that there’s no such thing as a free lunch. So it is written, so it shall be. As oil prices climb into the 90’s and maybe into the 100’s, we will see not only demand destruction but also new entries into the market. And once you turn on the switch, it will take a Herculean effort to turn it off. Watch and learn.
