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October 10, 2022

How to Trade the OPEC News

Michael J. Donoghue
How to Trade the OPEC News

On Wednesday, October 5th, the multinational group known as OPEC+, which consists of the OPEC member countries plus a selection of non-member allies (including Russia), made a shocking and controversial move. They decided to collectively scale back their oil production, which currently amounts to approximately 40% of the world’s supply, by 2 million barrels per day, or 2% of global output. This policy agenda comes on the heels of several months of declining oil prices, with brent crude oil falling below $95 a barrel from this recent summer’s highs around $125 a barrel. As the Economist describes, this organization operates in a manner comparable to an international central bank, with the goal of keeping oil and gas prices high and stable. These production cuts will surely be felt by consumers and investors around the world, which is why we ought to discuss how to trade the OPEC news.

What Exactly is OPEC?

The Organization of the Petroleum Exporting Countries, or OPEC, is an intergovernmental organization that plays a weighty role in influencing oil and gas prices on an international scale. Consisting of thirteen member countries which meet regularly, not only do they contribute well over a third of the world's oil supply, but they also own over 75% of the world's oil reserves. OPEC+ also includes ten additional countries which participate in OPEC’s plans, and whose sizeable global authority grows exponentially larger amid an energy crisis, particularly one primarily created by Russia, an OPEC+ participant.

Why Are These Output Cuts Significant?

These cuts, which could likely become more severe than expected given OPEC+’s reputation for failing to meet production goals, guarantee a smaller energy supply available within the global markets short-term, which necessarily creates higher oil and gas prices. This reduced supply and higher prices could not come at a worse time for many internationally speaking: European countries are already grappling with the consequences of underdeveloped energy sectors due to years of reliance on Russian exports, and many lower income countries are struggling under the burden of painful US Dollar-denominated debts and energy prices. This is a devastating economic blow to billions of people around the world, and it will reflect as such across financial markets.

Could Rising Oil Prices Be Mitigated?

Unfortunately, there does not appear to be much that can be done in the short-term to resolve this situation, at least on a multinational level. US President Biden announced a plan to release 10 million more barrels of oil from the US Strategic Petroleum Reserve in the month of November, in addition to the 180 million barrels already released since Spring of this year. While this may help cushion some of the initial blow for consumers, it is purely palliative, and unsustainable given the reserve’s limitations and the potential longevity of this energy crisis. Norway, now the EU’s largest supplier of gas, announced plans to use ‘joint tools’ to boost exports for Europe amid crisis, but precise details about this arrangement are currently few. It could take a grueling amount of time for the world’s countries to expand energy grids and develop diplomacy strategies to mitigate damage.

How Have Forex Fundamentals Changed?

Due to oil’s now artificially exacerbated scarcity, and its aforementioned effects on various economies, this news has certainly influenced market fundamentals, including within the forex market. For commodity traders, fundamentals appear to be quite bullish for US Oil into the near future and may continue to be so until global oil output returns to previous levels. For those trading currency pairs, this news is likely bullish for the Canadian Dollar, a ‘commodity currency’ since oil and gas production and exports are central for Canada’s economy. By contrast, this news offers further bearish potential for the Euro, since this current energy crisis has been catalytic in sending EUR to historic lows against other currencies, especially USD.

Three Trading Possibilities

The EdgeFinder, A1 Trading’s market scanner tool which offers traders holistic supplemental analysis for a variety of pairs and securities, corroborates the fundamentals mentioned above. The following three possibilities are viewed favorably for traders, and are listed with their respective ratings, biases/signals, and a chart which lists the specific factors the EdgeFinder takes into account.

A) USO - Earns a 7, or ‘Strong Buy’ Signal

How to Trade the OPEC News
How to Trade the OPEC News

B) EUR/CAD - Earns a -2, or ‘Neutral’ Signal (personal sell bias)

How to Trade the OPEC News
How to Trade the OPEC News

C) EUR/USD - Earns a -7, or ‘Strong Sell’ Signal

How to Trade the OPEC News
How to Trade the OPEC News

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DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here
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