OPEC+ production cuts mean higher oil but uncertainty for gold

  • OPEC+ cuts production: The move should be inflationary 
  • Lower oil supply supports oil: The move helps the oil price to move higher 
  • An uncertain impact on gold: Higher inflation may mean more Fed hikes, so it leaves a mixed outlook for gold, for now.

OPEC+production cuts shock oil markets

The decision of OPEC+ countries to further cut production has come as a shock to major markets.

Just a matter of weeks ago, the Saudi oil minister Prince Abdulaziz bin Salman said that the existing production targets were “here to stay for the rest of the year”.

However, countries including Saudi Arabia, Irad, the UAE and Kuwait have agreed to cumulative cuts in production adding up to over 1 million barrels.

Add in the extension of a 500,000 cut to Russian production, this means that from July production will be around -1.6m barrels per day lower than previously expected.  … 

An oil supply deficit

With China coming back up to full speed after the economic re-opening at the end of 2022, this production cut is expected to add to a growing sense of an oil supply deficit in 2023.

Before this announcement, according to the IEA (International Energy Agency), the supply/demand equations were already set for an oil supply deficit of just over 1m barrels per day.

However, this announcement will increase the supply deficit even more. 

Compliance over the production cuts will be important, but where there is a will, there is a way. 

Saudi Arabia (expected to cut by 500,000 barrels) tends to meet its production quotas, whilst political will be strong in Russia to also meet its compliance targets (of 500,000).

The impact on oil prices

Although OPEC+ has a history of issues with compliance and a failure to meet production cuts, there is enough to suggest that there will be a sizeable reduction in supply.

Brokers were caught by surprise by the OPEC+ move. However, the general view is that it likely means that the outlook for the oil price has increased.

Goldman Sachs and Bank of America have targets between $90 and $95 on Brent Crude. 

The inflation question

Higher oil prices add to inflation pressures.

This leaves central banks such as the Federal Reserve in a difficult position.

The Fed is already having to tackle a banking crisis and the potential recessionary forces arising from its monetary policy tightening.

This move just makes the Fed’s job that much harder.

At the moment there has not been any lasting increase in US bond yields, but analysts will be watching moves on the 2-year Treasury yield.

At the moment there has not been any lasting increase in US bond yields, but analysts will be watching moves on the 2-year Treasury yield.

The US 2-year yield is seen as a strong indicator for interest rate moves and if it moves above 4.25% it would be a strong indication of a decisive shift in sentiment on US interest rates.

Key markets for MENA traders

This will impact two markets that are always important for MENA traders. 

Moves in Brent Crude oil will be key, but also important for gold too.

Brent Crude oil is approaching a key crossroads

The sharp move higher in the oil price on Monday leaves Brent Crude oil at a crucial crossroads.

The resistance between $86.75/$89.00 has proved to be a barrier with several key highs in recent months.

Brent Crude oil is approaching a key crossroads

However, with the strong improvement in the technical analysis, the potential for an upside break is growing.

  • Daily RSI momentum is strong in the mid-60s (at its highest since June 2022)
  • A close in the $90s would open the way towards $100.

There is now important support between $80/$84.

Gold is still bullish

The immediate reaction on gold following the OPEC+ news has been one of uncertainty.

If higher inflation leads to more Fed rate hikes, then the rally on gold will be restricted. This will be an evolving situation.

However, what has not changed is that, for now, there is still a positive technical outlook.

Gold is still bullish

Holding on to the support of the breakout between $1929/$1959 is sustaining the potential for a move back towards the all-time high at $2075.

RSI momentum is strong and continues to suggest that near-term weakness is a chance to buy.

A break above $2010 would open moves towards $2070/$2075.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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