Big Oil Consolidates: The BRICS Effect

Published 2024/08/07, 10:40

Half of the World’s Population Is Part of an Organization With Increasing Control Over Crude Oil

The developed world is spectating as some of the largest countries in the world, both economically and in population, are teaming up through the multinational alliance known as BRICS. Controversial countries on the global stage are banding together with emerging economies to form a pact for economic development that would rival the existing Euro-Pacific group known as the G7. The west is dangerously quiet about this growing powerhouse, which is having increasing control over an essential commodity – crude oil.

History of BRICS

In the global political theater, there are fewer countries more controversial than Russia and China. While they are both giant economies, they have been criticized and pushed away by the west. The reasons for that, to a very large extent, are their totalitarian political regimes. This has resulted in suboptimal trading conditions with the rest of the world.

Back in 2006, Russia tried to fix that by putting forward a proposal to create an organization for economic cooperation. It was accepted by three other countries from the United Nations – China, India, and Brazil. This marked the beginning of the BRIC union that would seek to bring economic prosperity to its members the same way the EU did to Europe.

South Africa tagged along in 2010 and transformed the pact to what's now known as BRICS. Fourteen years later, in 2024, five more countries joined it – Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates, according to the official BRICS website. About nine other countries have expressed their interest in becoming members, including Venezuela.

Emerging Economies vs. the G7

If there is something that the BRICS members have in common, it's that they are not classified as developed economies either by the United Nations or the International Monetary Fund (IMF). This would theoretically mean that they are not as advanced or wealthy as European or North American countries. But when we look at economic growth, that's just not true.

How do they measure up to the developed economies? Statista reports a surprising turnaround in the two groups' economic outputs right around 2017-2018. The last actual data is from 2022 when BRICS' combined Gross Domestic Product (GDP) as a proportion of the world's was 34.17% while G7's—which consists of the UK, Germany, France, Italy, Canada, Japan, and the US—was at 30.47%.

Share of world's GDP over time for BRICS and G7 countries. Source: https://www.statista.com/statistics/1412425/gdp-ppp-share-world-gdp-g7-brics/


What this means is that irrespective of how they're classified, their economies together were worth more than the most advanced western countries combined. This, on its own, makes the group of emerging markets and developing economies a force to be reckoned with in the economic arena.

How They Plan to Grow

With economic wellbeing the centerpiece around which BRICS is built, its efforts revolve mainly around monetary support of the member states. The alliance has established two institutions that to some extent mimic the purpose and function of several international entities but without the strings attached.

The first one is the New Development Bank which funds projects within the member countries, much like the EU in Europe. The second one is the Contingent Reserve Arrangement which maintains currency stability like the IMF.

It's clear that BRICS has no intention of relying on the west for such economic cooperation and is confident in its ability to build its own frameworks to that end. This is important for a handful of reasons. First and foremost, it means the US, the UK, and the EU would have limited leverage when making any kind of political or economic demands.

This is a crucial factor for both Russia and China as they are routinely strong-armed by western economies through trade barriers and asset-freezing, both of which could be avoided through strengthening internal trade relations between the member countries.

But perhaps the pact's most significant contribution is one that hasn't left the drawing board yet. That's their ambition to forge a common currency. During their 2023 meeting, the member countries decided to explore the possibility of adopting a single currency which would make international trading easier and cheaper. Good for them, but how is that important for the rest of the world?

The Underdog's Trump Card

I intentionally enumerated the member states in BRICS at the start. Did you notice anything peculiar about some of them? Well let me jog your memory. Russia, the de-facto leader of the group, is an exporter of crude oil, among other things. Not only that, but they're quite a big player in the market – the second largest in the world.

Their greatest victory so far is that they've managed to attract several of the other key players in the same industry too – Saudi Arabia, the United Arab Emirates, and Iran. Not only that, but it's entirely possible that Venezuela joins too, which harbors the largest proven crude oil reserve on the planet.

BRICS essentially houses the 2nd, 3rd, 5th and 6th largest oil producers and exporters on the planet whose supply combined equaled 24.93 million barrels a day (mbd) for the year 2023. Compare that to the US' 12.93 mbd for the same year and you see that BRICS countries made an extra USA worth of barrels last year.

Graphics by Banxso. Source: https://www.eia.gov/outlooks/steo/data/browser


And this is where their alliance can truly shine. Forget about political fairness and transparency, socio-economic obstacles, and a stable domestic currency. Those are just technicalities that matter little when you effectively control the world economy through the most valuable resource known to man – petroleum.

The question now is: If more and more OPEC countries join BRICS, how can that affect their control over oil?

Crude oil is predominantly priced in USD to this day, leading many to believe this is the only currency OPEC would accept for the commodity. While it has been the case for the most part, USA's alarmingly increasing deficit is concerning because their entire economy can crumble under the pressure of its unpayable debt. If that happens, the USD might become worthless.

If some of the most economically powerful nations on the planet go through with their common currency plan and 45% of the world's population begins using it, how will it affect the reserve currency of the world – the US Dollar? If that political and economic alliance also supplies a third of the planet's petrol, do you think they would want to price it in their own currency instead?

And if they have control over both the currency and the commodity, what will stop them from selling crude oil for any price they wanted?

Source: https://tradingview.com/


Even now, geopolitical conflicts in Europe and the Middle East are pushing crude oil's price up. The World Bank has said that if they continue, we might be seeing oil prices go as high as $100 per barrel. And if BRICS succeeds in creating its own currency and attracting even more petroleum producers, do you think this scenario becomes more likely?

Technical Analysis Of Crude Oil

Source: https://tradingview.com/

Key Levels

  • $66.87 is a key level on the monthly chart. It served as a solid resistance level in both 2019 and 2020. After it was broken, it acted as a support in 2021 and 2023.
  • $75.29 is another key level on a macro scale that crude had difficulty breaching in 2010 & 2018 but later broke in 2021. It might prove to be a strong resistance in 2024.

Bearish Pennant Pattern

  • Since May 2023, crude oil has been forming a bearish pennant pattern, beginning at the $65 level. As the pattern is consolidating near its conclusion, we might see a potential breakout. If the price breaks the bearish pennant support trendline, it could trigger a sell-off.

Relative Strength Index (RSI)

  • An RSI value of 45 suggests that crude oil is leaning towards being oversold, implying that it may be undervalued. Low RSI values often indicate a potential reversal in price direction.

Bollinger Bands (BB)

  • The price has been hugging the lower Bollinger Band for the past 18 days. The lower band can sometimes be interpreted as a support, while also signaling potentially oversold conditions that could reverse the direction.

Conclusion

  • Crude's price recently broke through one of its long-term support levels and is headed to the bearish pennant support. Both the Bollinger Bands and the RSI suggest a potential reversal in price, so strong support can be expected from the pattern. If it's broken, a continuation to $66.87 can be expected, while if it rebounds, it will need to tackle $75.29 as a newly formed resistance.

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