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Oil Market is thriving since Production Cut

Any person who owns individual oil stocks or ETFs in their portfolio may feel blessed. Indeed, the oil market is currently thriving since Saudi Arabia, one of the largest producers of oil and OPEC members, decided to cut its production on April 3. The Organization of the Petroleum Exporting Countries (OPEC) is a group of major oil-producing countries that controls a significant portion of global oil production. As Saudi Arabia decided to cut its production in order to maintain stability in the oil market, the price of oil necessarily surged because cutting its production means reducing its availability to the market while demand for such a commodity remains stable. When the supply of a commodity is reduced while demand is unchanged, then the level of such a demand is perceived as it has increased although it did not necessarily increase. The world’s dependency on oil has always been high since we use oil for nearly anything. As a result, the price of the commodity augments. This is what we’ve seen with the oil market.

Oil Futures Price since January 2023

Source: Google Finance

Today, on April 11, 2023, oil futures climbed drastically, with U.S. prices settling at their highest since January, a day after posting the lowest finish in more than a week. In early January, the price of crude oil futures was $76. Today, this price increased to $81.33, which represents a 5.71% surge in the price of oil futures since January 2023. According to Troy Vincent, the senior market analyst at DTN, the oil market is stuck between two competing narratives. He claimed:

“On the bullish side, you have hopes of OPEC + cuts and a Chinese economic rebound in the second half of the year pulling oil prices higher. On the bearish side, you have a growing expectation that the U.S. will move into a recession later this year, pulling down growth hopes for developing economies as well.”

U.S. Retail Gas Price since January 2023

Source: YCharts

One clear evidence of the surge in oil prices is the surge in the price of gasoline. Indeed, the price of gasoline is ultimately determined by market dynamics, which can be influenced by factors such as competition between gas stations, taxes, and consumer behavior. When the price of crude oil increases, the cost of refining it into gasoline also increases. This is because crude oil is a finite resource and its extraction, processing, and transportation can be costly. Additionally, when the global demand for crude oil increases, it can cause the price to rise due to competition for limited supplies. As the cost of producing gasoline increases due to the higher price of crude oil, gas stations must also increase their prices to maintain their profit margins. Therefore, when the price of crude oil goes up, the price of gasoline at the pump also tends to rise. As we can see, since the beginning of the year, the price of gas increased. As we can, oil price in January 2023 was less a $3.40 a gallon. Today, it is at $3.70.

For the price of crude oil and gas to drop, some political events may shape the supply of these two commodities. We remember that the War in Ukraine at the outset, played a major role in the augmentation of the price of oil and gas last year. A political event may impact the price of oil and gas. The Federal Reserve's forthcoming meeting in May 2023 on interest rates may as well decline the price of oil and gas. If the Feds decide to raise rates, then the price of oil and gas will drop. But we do not know to what extent it will drop, only time will tell.


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