Fighting Fire with Oil

October 13, 2022 | Rodrigo De La Peña Alanis, Associate Research Analyst

Three-line chart showing oil production and prices. Chart subtitle: Historically, production cuts by OPEC+ have led to higher oil prices. Chart visual description: Left y-axis shows Million Barrels Per Day and ranges from 0 to 90. X-axis spans dates from January 2001 to present, with labels at 11-month increments, so ending at Feb-22. Right y-axis shows Crude Oil Price, from $0 to $160. Green line plots World Oil Production; tan line plots OPEC+ oil production; and slate line plots Brent Crude Oil price. Chart data description: OPEC+ production line hovers near 30M bpd for entire range shown, with worldwide oil production beginning near 70M bpd and peaking at the end of 2019 over 83M bpd. As explained in the write-up, prices climb and peak significantly based on OPEC+ production cuts, notably in the years following the GFC and in 2020 during the COVID slowdown. Chart source: Bloomberg as of September 30, 2022. End chart description.

Lower oil prices, primarily via lower gasoline prices, were a key contributor to headline CPI moving off peak in July and August. Since late September, however, oil and gasoline prices have started to rise again. In early October, OPEC+ — comprised of the 13 OPEC members and 10 additional major oil-exporting countries, including Russia — agreed to steep oil production cuts, decreasing supply in an already stressed market. The total production cut is estimated to be around 2 million barrels per day (bpd), approximately 2% of global supply and the biggest production cut since the start of the COVID pandemic.

The move is expected to prop oil prices back up — as similar production cuts have done historically — after the commodity had fallen considerably over the last three months amid fears of a global recession, the stronger dollar, and higher interest rates. Higher energy prices would weigh on European countries, which are more heavily reliant on Russian oil and already facing recession, as well as the U.S. consumer, with oil accounting for roughly half of the retail price of gasoline. Earlier this year Federal Reserve Chair Jerome Powell quantified the impact of higher oil prices, noting every $10 per barrel increase in the price of crude raises inflation by 0.2% and sets back economic growth by 0.1%. The decision also adds to already heightened geopolitical tensions, with President Biden pursuing consequences for Saudi Arabia, the de facto leader of OPEC, following the announcement. This evolving situation is one more unknown variable to monitor as we look for macroeconomic clarity.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Rodrigo De La Peña Alanis
Associate Research Analyst

Get to Know Rodrigo

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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