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OPEC considers Suspending Russia from Production Deal
01.06.2022

Over the past 24 hours the price of oil has seen two significant price movements with the latter of the two forming the strongest trend. The price of oil increased by over 2.5% within the first two trading sessions and was able to break out of previous resistance levels.

However, the price was quickly rejected when the US market opened. As the US trading session began, the price of oil declined by 4% within a period of 5 hours. As expected, the price movement halted traders from opening new positions until there is further clarity.

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EU Agrees on Oil Ban

The price of oil was initially influenced by the European agreement to gradually halt the supply of Russian oil to the Eurozone. The Eurozone agrees on sanctions after lengthy negotiations, which, among other things, include a partial ban on the supply of Russian oil, and also prohibit operations related to the delivery of energy from Russia to third countries.

This ban triggered a surge in fear over the supply of oil. Generally speaking, as supply becomes scarce or an asset difficult to obtain, the price tends to increase because the battle to purchase becomes more difficult. Generally speaking, this has fueled the price spike over the past 3 months as the Ukraine-Russia conflict rages on.

Oil Price Risks

Nevertheless, the story continues to develop and turn corners. Late yesterday, some OPEC+ officials indicated that the group may potentially suspend Russia from oil production deals. This was received poorly by the market as it can potentially lead to less control, with countries increasing the amount being pumped into the market.

Exempting Russia from the group’s production obligations could potentially result in pumping significantly more crude, specifically in Saudi Arabia, the United Arab Emirates and other producers in the cartel. This is also something which the US and EU have pressed them to do as the invasion of Ukraine sent oil prices soaring above $100 per barrel.

The increase in supply could potentially influence the price of oil if this course of action does take place. Though traders should be cautious of new developments which can change the trend in the price again. Currently, there have been no concrete steps but purely comments and indications. Some economists have indicated the move may be difficult to implement.

Exempting Russia from OPEC+ is a potential risk for oil prices. A second potential risk is related to a possible recession, as per the advice of most economists and Central Banks. A recession or a general decline in economic activity can indeed lead to a decline in the demand for oil. If this is not met with alterations to the supply, the price could potentially decline. A similar decline was triggered by the US 2007/2008 recession and again in 2015 after the EU’s banking crisis deepened.

Latest Price Movement

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As mentioned above, the price movement has slightly increased this morning as some buyers have returned to the table. The price has increased by 1.14% over the past hour but remains below yesterday’s original price range. Generally speaking, the price remains high and above moving averages, but traders should remain cautious of any further downward movement. Traders will be following the developments in the EU and OPEC, as well as the oil inventories as all of them are likely to further influence the price.

IMPORTANT NOTICE: Any news, opinions, research, analyses, prices or other information contained in this article are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and therefore, it is not subject to any prohibition on dealing ahead of dissemination. Past performance is not an indication of possible future performance. Any action you take upon the information in this article is strictly at your own risk, and we will not be liable for any losses and damages in connection with the use of this article.
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