A big move in the markets, and a big move in geopolitics. The Biden vs Saudi Arabia/OPEC battle has taken a major turn. The US began selling off their emergency oil reserves to flood the markets with excess oil to bring down oil prices. The reason? To bring down inflationary pressures.
Fast forward a few months, and the Saudis have been getting closer to the China and Russia Eastern sphere. China brokered a deal between Saudi Arabia and Iran which saw both nations officially restoring diplomatic relations. Huge news which may not have been covered much by Western media.
Many analysts are saying that this move has huge repercussions for the US. For those that do not know, the US Dollar is the world reserve currency largely thanks to a deal made between King Faisal of Saudi Arabia and Henry Kissinger which was the largest oil producer in the world accepting only Dollars for their black gold. With all energy and commodities being settled with US Dollars, the Dollar has been called the Petrodollar.
Many contrarians have spoken about the fall of the Dollar… and we are seeing moves which could definitely see Dollar demand getting hit.
The big move would be the Saudi’s accepting Yuan and Rubles for their oil. The Petrodollar system would be in peril. The Russians have been accepting any currency besides the Dollar for their energy. And guess what? Japan is now even buying oil from Russia, breaking with US and EU allies.
What would be the reason? Settling payments for energy using Yen and other currencies is appealing to the Japanese given the move in USDJPY. You can imagine that many nations which have seen their currencies depreciate against the US Dollar will follow along.
Japan is also the number one buyer of US Treasuries, needing those Dollars to import energy and commodities. But with BRICS (Brazil, Russia, India, China and South Africa) making moves and deals ditching the US Dollar, other nations are beginning to acknowledge this new sphere.
Saudi Arabia included.
We have all seen those memes with Mohammed Bin Salman high fiving Vladimir Putin. Saudi and Russian relations have strengthened due to OPEC+ which has put a strain on US-Saudi relations. And now China is getting involved, courting the Saudi’s closer to the Eastern sphere.
Yesterday’s OPEC+ announced was called ‘inadvisable‘ by the US, and further strained US and Saudi relations.
Saudi Arabia and other OPEC+ oil producers on Sunday announced further oil output cuts of around 1.16 million barrels per day, in a surprise move that analysts said would cause an immediate rise in prices.
The pledges bring the total volume of cuts by OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other allies, to 3.66 million bpd according to Reuters calculations, equal to 3.7% of global demand.
Saudi Arabia, Kuwait and the UAE said they would remove more than a combined 1 million barrels per day from global oil markets, as part of an independent initiative unlinked to the broader OPEC+ policy.
Oil prices popped on this surprise move, and is currently up over 5% at time of writing.
A huge gap up, and the trend has shifted. A few weeks ago, I told readers that all energy was bearish given the big breakdown below $72. This triggered a major head and shoulders reversal pattern on the weekly chart. Oil was retesting the breakdown zone before OPEC+ surprised the markets.
With this production cut, oil prices have comfortably climbed back above the $72 resistance zone. This is now support.
There is some interim resistance here at the $82.50 zone. A breakout above this zone would see oil prices move back above $90.
So why does this all matter for markets? Well:
“The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world. That would, however, lower economic growth and reduce oil demand expansion,” said Victor Ponsford of Rystad Energy in a research note.
Those inflation numbers may not be peaking just yet. Surprise CPI moves higher will now spook markets as the Fed and other central banks will need to keep up the hawkish stance. This OPEC+ move definitely complicates the Fed’s job.
US markets are mixed with the Nasdaq turning red as oil pops.