For the first time since the outbreak of the Corona pandemic in spring 2020, so-called OPEC+ met in person at ministerial level last week. In addition to ten members of the Organization of Petroleum Exporting Countries, representatives of ten other oil-producing countries, led by Russia, sat at the negotiating table in Vienna. Together, the participants account for more than 40% of global oil production. At the OPEC headquarters, the cartel once again played out its market power: OPEC+ agreed to cut daily production by 2 million barrels starting in November. The group is thus curbing the output of its oil pumps more sharply than at any time since 2020. At that time, the group had braced itself against the collapse in demand in the wake of the Corona pandemic with massive cuts. The latest move is OPEC+'s response to falling commodity prices. A mix of emerging recession concerns, a strong U.S. dollar and rising interest rates have weighed on prices in recent months. In March, for example, a barrel of Western Texas Intermediate (WTI) cost more than USD 130 for the first time since 2008. By the end of September, the price of U.S. crude oil had fallen by more than 40% compared with this high.
Rumors of a market intervention by OPEC+ had already boosted the price before the meeting. After the actual decision, the rebound gained strength. In the meantime, WTI is trading almost one fifth above the low of September 27 (see chart). With the latest decision, the cartel is also sending a political signal. According to unconfirmed reports, Russia in particular had been pushing for a production cut. Moscow is said to have proposed a cut in daily oil output of 1 million barrels. The even more extensive intervention now planned is completely contrary to U.S. interests. Washington was opposed to the cuts because a low oil price reduces Russia's revenues and could also alleviate inflationary pressures. In fact, OPEC+ is unlikely to achieve the planned cut. The baseline for the latest decision represents the output agreed for August 2022. However, the group had significantly undercut this target - in part because of Western sanctions against Russia. The analysts at Goldman Sachs therefore assume that OPEC+ will de facto only reduce their production by 0.4 to 0.6 million barrels per day.
For the further development of the oil price, it is crucial how the global market balance develops. As is well known, the pandemic initially triggered a surge in inventories. The tightening of supply, together with the end of the lockdowns and a gradual normalization of economic performance, ensured that the tide turned: starting in Q3 2020, demand exceeded supply in every quarter until early 2022. According to U.S. Energy Information Administration (EIA) figures and forecasts, there was once again a global surplus during the summer months - despite the travel season (see chart). Today, the U.S. Energy Information Administration publishes its next short-term market outlook. It will be interesting to see whether and to what extent the EIA experts react to the latest OPEC+ decision. On December 4, the cartel meets again. It is possible that the U.S. will react to the Vienna decision by then. "A policy response from the Biden administration is likely," J.P. Morgan analysts write. Specifically, they believe an accelerated release of strategic oil reserves is possible.
What is certain is that the correction as well as the recent rebound have left their mark on the volatility of oil prices. The next-maturity futures contract on WTI, starting from the beginning of the year, shows a price fluctuation range of close to 50%. On the U.S. equity market (S&P 500 Index), the historical volatility is only about half, despite various turbulences. With new barrier reverse convertibles, the zigzag price of black gold can be turned into an interesting investment profile. Based on WTI, the issuance in the product currency USD comes with a high coupon of 20% p.a.. In the CHF counterpart, the guaranteed quarterly payout is 17% p.a.. The barrier in each case is a low 55% of the initial fixing. In a third variant, Leonteq combines the two oil classes WTI and Brent as underlyings. Here, the coupon amounts to 19% p.a. with an identical barrier and in the product currency CHF. The following applies to each BRC: As soon as an underlying uses up the risk buffer, the partial protection expires. In this case, the redemption is linked to the continuation of WTI or the weaker future in the case of the Multi-BRC. Please also note the issuer's right of termination (softcallable).
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