DBO - Production cuts by Saudi Arabia and Russia are a delicate balancing act

2023-09-06 07:12:46 ET

How will higher oil prices factor into the economy and can they be sustained? Those are some of the questions traders are now asking as they look to position their portfolios for the rest of 2023 and beyond. Remaining below $80 per barrel for most of the year, WTI crude futures ( CL1:COM ) broke above that price level in the summer, and jumped to as high as $88/bbl on Tuesday (Brent traded above $90) after Saudi Arabia and Russia said they would extend their voluntary production cuts through the end of the year .

Inflation risk: Many had thought the OPEC+ leaders would lengthen their cuts into October, but the three-month extension came as a surprise. Equities also saw some knee-jerk losses , with the likelihood of higher prices leading to more monetary tightening. The latest cuts by the Saudis (1M barrels per day) and Russians (300K bpd) are on top of the April cut agreed by several OPEC+ producers (1.66M bpd) - which extends to the end of 2024 - while both countries stated they could even consider deepening their cuts further depending on market conditions.

Following the announcement, U.S. National Security Adviser Jake Sullivan said that President Biden is "doing everything within his toolkit to be able to get lower prices for consumers at the gas pump." The national average price of a gallon of regular gasoline now stands at $3.811 a gallon, according to data from AAA, marking the highest seasonal level since 2012. Higher energy costs could also dent hopes and forecasts for a "soft landing," which has gained renewed momentum following a recent spate of economic data .

What to watch: Expensive energy could curtail growth across the globe, especially in China, whose economy is under pressure due to the nation's stop-and-go pandemic rebound, property troubles and debt problems. The Saudis and Russians need to be careful about this, and pull off somewhat of a balancing act, because if things get worse for China as oil prices stay high, their recent cuts may end up backfiring and reduce demand for the commodity. Interestingly, the G7 - along with the EU and Australia - also appear to have deferred regular reviews on their $60 Russian oil price cap scheme despite Urals grade crude trading at $74/bbl on average in August.

ETFs: NYSEARCA: USO , NYSEARCA: UCO , NYSEARCA: BNO , NYSEARCA: SCO , NYSEARCA: USL , NYSEARCA: DBO , NASDAQ: USOI , NYSEARCA: NRGU , BATS: OILK , NYSEARCA: USAI

Related stories

• USO: The Next Oil Bull Market May Have Begun
• Oil price forecast raised at Barclays amid limited global supply

For further details see: