Oil price: have the production cuts placed OPEC+ under severe strain?


Oil prices in 2023

With the oil price rally that we saw on Monday being dubbed as one of the shortest of its kind, Saudi Arabia, the largest crude oil exporter in the world, has been left reeling from yet another shock from the unpredictable behaviour of  the commodity markets.

As of 13:00 GMT on Wednesday, the prices of WTI and Brent stood at $72.48 and $77.01 respectively.

The Kingdom did turn towards the most rudimental pillar of economics out of desperation to shore up the dwindling oil prices – demand and supply; it hoped that by cutting down on the latter, it would increase the former and thereby, of course, the prices – and then its revenues in that order.  

With that hope, Saudi Arabia announced a voluntary production cut of over 1 million barrels  at an unusually contentious OPEC+ meeting on Sunday. The de facto leader of the OPEC+, Saudi Arabia, always had a messianic presence in the organization since its inception in 1960.

In its heyday, for instance, Sheikh Yamani, the former Saudi petroleum minister, had such an influence in the oil markets that he could literally bring the prices of oil up and down just by moving his eyelids in the same directions, as every word he used to utter was under intense scrutiny by the markets; he used to do it even without being a member of the Saudi royal family – just an educated,  no-non-sense commoner.  

Judging by the difficulties that the Saudis encountered at the OPEC+ meeting on Sunday in its endeavour for oil production cuts, it is clear that the influence of the Kingdom in the group appears to be on the wane.   

When Prince Abdulaziz bin Salman, Saudi energy minister, announced that the voluntary cuts of over 1 million barrels per day at the weekend, understandably, the markets reacted favourably on Monday, the next day,  quite feebly at first, only to fall back to where it had been up until then. 

By evening on Tuesday, however, the prices of oil have fallen back to the level they had been at for weeks, dealing a hammer blow to the short-term Saudi strategy that appeared to have stemmed from an axis of strong emotions rather than that of responses to evolving market trends. 

US Crude stocks - EIA
US crude stocks – EIA

Recently, the IMF published the data highlighting the break-even prices for the major oil producers in the world: it was just above $80.09 for Saudi Arabia; the price of Brent at present is a way below that; you do not have to be a  rocket scientist to gauge the direct impact on Saudi finances, if the status quo remains as it is. In this context, Saudi frustration – or even apprehension – is perfectly understandable. 

In 2021 and 2022, the corresponding break-even prices had been $75 and $67 respectively. It means, the estimated value for 2023 has gone up steeply, leaving the Kingdom at a very difficult position. 

The way break-even prices of each producer has risen in recent years clearly shows that the latter is not immune to inflationary pressure either. 

Having been committed to quite a few mega-projects aiming at a post-oil era, the Saudis need money for fulfilling the grand ambition. Since its main income comes from oil, selling the very commodity way below the break-even prices has pushed the Kingdom to the wall. 

Breakeven oil prices 2023
Breakeven prices of oil – 2023

In addition, it has to address the growing needs of a relatively young populace in order to nip the potential for dissension in the bud ; over 63% of its 32.2 million inhabitants are below the age of 30 years.

When Prince Abdulazis bin Salman, the Saudi oil minister and the half-brother of Prince Mohammed bin Salman, threatened the short-sellers last week against the ‘market manipulation’ and vowed a proportional response, it reflected the gravity of the issue faced by the Kingdom. 

The anticipated response from the Saudis against the short-sellers, however, at the latest OPEC+ meeting on June 4, was more of an individual move rather than a collective strategy; Saudi Arabia announced a voluntary production cut of 1 million barrels per day – bpd – whereas others prefer sticking to existing quota of production cuts. 

In short, the de facto leader of the OPEC+, Saudi Arabia, much to its dismay, appeared to have found out that it was not easy to call the shorts anymore in the organization. 

As far as the other members are concerned, including Russia,  they just want to sell oil and make money; it is a case of making hay while the Sun shines; they may have realized that the production cuts did not necessarily mean an upward movement of the prices of oil – based on their very own, recent experiences. 

The members of the OPEC+, who are reluctant to go for more production cuts, appear to be aware of the current state of global economy, which is far from rosy; they are aware of the destructive role played by the high energy prices in pushing the world to the brink, something that the Saudis had overlooked in order to address its own revenue concerns. 

As for the Saudis, the production cuts mean the loss of revenue in direct proportion. As a result, Saudi Arabia has been compelled to increase the price of oil for its most loyal customer base for decades, Asia. 

This will result in them turning towards Russia for their energy needs. China and India, the world’s second and third largest consumer of oil respectively, for instance, have already embarked on a buying spree, knowing very well that the threat of international sanctions is manageable, thanks to their growing political influence on the global stage. 

If the price of oil from the Middle East goes up, they will keep buying more oil from Russia and the rest of Asia will follow suit. Pakistan, which is at the centre of a major economic crisis, for instance, may strike a deal with Russia soon for its oil needs. 

Saudi Arabia raised the price of oil for Asia in the past too, but revised it down, a few weeks later, perhaps in response to flagging demand – an inevitable consequence. 

In addition, the volume of imports from South Asia, especially from Sri Lanka, Pakistan and Nepal, has come down drastically due to prevailing economic troubles in respective countries. 

In this context, a rise in oil price – even as a purely cosmetic measure – is hardly a catalyst for shoring up the demand from Asia, especially when there is plenty of oil at rock bottom prices elsewhere.

Against this backdrop, the perceived unity among the OPEC+ members is again under spotlight as never before. Some analysts fear that a potential, major fissure in the cartel is inevitable over the production cuts – and a few regional issues too – in the near future.


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Is This Market Resilient or What?

Have you ever stood at the edge of the Grand Canyon and wondered about all the history of each cave or ridge? What about the multiple valleys that ultimately drain to the Colorado River? It is a daunting site to behold, but, as the winds blow past you and the hawks soar overhead, you can quickly see that just one viewpoint doesn’t do it justice.

Photo: Greg Schnell

This week’s price action in the stock market reminds me that there are multiple perspectives of where we are in the stock market journey. Everyone’s viewpoint is different, and that’s what makes a market. Technology investors see one perspective. Commodity investors see another. Bank dividend investors are seeing a new view as well.

I went to look and see what were the top-performing industries over the last week while the banks were imploding, and it was travel and leisure, hotels, and gaming. I had no idea that the resilience of those groups could hold up a market.


Financials are breaking down, both big and small. Financials used to be important, but apparently they do not matter, as the $SPX touched a fresh 2023 high last week.The charts of C, WFC, and BAC don’t look nearly as healthy as JPM. The regionals are bombing out, and a few might get merged this weekend. I think we have all seen the KBE and KRE ETF charts. The main point of the picture below is that JPM is holding up; the others are not.

Here is the banking index. That 2010-2023 trend looks broken. Even by just ignoring the COVID situation, this looks broke, and a test of $60 wouldn’t be hard to imagine. The bottom panel shows 15-year relative strength lows.

The broker dealers, usually considered as one of the leading industries, looks better than the banks. Does the trend line hold? The PPO is going below zero again. This is a chart that suggests, to me, that this problem will get bigger.

Industrial Metals

The industrial metals commodity index by Goldman Sachs is making lower lows and lower highs since January. Is this just China managing commodity demand to load up on cheap commodities before the next run starts? That would be no different that the US government managing oil pricing by releasing the strategic petroleum reserve. So this isn’t taboo, but other nations do it on a lot more commodities than just oil.

Crude Oil

Crude oil continues to struggle. That rally last Friday was just that. It was so-o-o last week, as crude slid below $65 this week. Before market open on May 5, this chart shows crude down 10% on the week, and that isn’t even the bottom of the candle.

$SPX Price Earning Ratio

The price/earnings ratio for the stock market, sitting up near some of the most stretched extremes in history, was barely discussed at the CMT Association meeting. Purple is current, and the other three lines are where it would be based on lower P/E ratios. We have lived in a stretched world since 2014, so why would that view matter now? I show this chart to demonstrate that, if we reverted to 20, we would be below 3500, and if we reverted to a P/E of 15, 2600 is in play. It is not uncommon for recessions to cause a valuation reset of the market broadly.

Bonds and the Yield Curve

At the CMT Association meeting, the yield curve or the history of the yield curve was never mentioned in any of the conversations and presentations I sat in on. It didn’t fit with the bullish narrative of the $SPX and $NDX at 2023 highs. By the way, most portfolio managers think we are going much higher (but don’t mention the yield curve).

Actually, I was amazed that no one even mentioned it, even though the whole bank valuation issue right now is hold to maturity (HTM) bonds. Bonds are the problem, not the equity market.

The real deal is bonds add another perspective, much like the Grand Canyon viewpoints. Change any one viewpoint and it looks totally different. We find an entirely different view over in the yield curve. Bonds are one of the four major asset classes, but only Louise Yamada ventured there, showing a 40-year break of the interest rate trend line for long bonds.

The current yield curve did not seem to matter, nor did the history of the yield curve. So let me add a few yield curve charts here. The vertical line on the right side at year 2000 is the top yield curve line on the left. The vertical line at 2007 is the bottom yield curve line on the left.

So what does the yield curve line look like right now? It is the bottom line on this chart below, comparing with the 2000 top. They look similar to me.

Why does that matter? Let me use another chart to explain what is happening. The 30-year yield is now higher than the middle or the belly of the curve. This is changing rapidly as the yield curve starts to realign. If you look on the right side in the zoom panel, the 30-year yields are starting to hold above the middle of the curve yields. The 30-year yield may cross above the 2-year soon. But look at the congestion zones when the yields get tight. The equity market response is shown as this starts to broaden out. $SPX is on the lower panel.

Fed Rate

Now that a large portion of money managers assume the Fed is done raising rates, where does this leave us? The chart that makes a big impression on me is the rate of change of the Fed funds rate, shown in green in the lower panel. This isn’t the rate of change of something like lumber. This is the rate of change for one of the most tracked interest rates in the world.

The assumption that the entire business world can adapt rapidly to absorb one of the fastest rate changes ever does not seem plausible to me. As this rolls through boardrooms across the world, when will it crack the equity market investors? So far, the equity markets are not blinking.

I am on another viewpoint — wide-eyed, staring over my view, suggesting something is amiss and about to fall sharply. Will it happen in May or June? Or will it take until October? I don’t know, but I don’t see this working out ‘perfectly’ as we try to go to take out the 2021 highs.

To me, it looks like a setup we should be cautious of. When the market continues to struggle to make higher highs here after six weeks, is this just a consolidation? Or is it a final realization that it’s about to get messy?

If you would like more perspectives on this, I’ll be holding a monthly conference call for clients on Sunday. At Osprey Strategic, you can try out our services for just $7 for the first month. I’m a big fan of protecting capital until the time is right to step back in. Day traders need not test the waters. They won’t find anything they like there. This is for investors with large amounts of capital with the wisdom and patience to wait for a better backdrop.

Greg Schnell

About the author:
Greg Schnell, CMT, MFTA is Chief Technical Analyst at Osprey Strategic specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA).

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OPEC+ production cuts failed to excite the oil markets

Oil price – April 6

The price of crude oil, despite going up by almost 6% on Monday morning, thanks to the abrupt production cuts announced by the OPEC+, lost it momentum again as the days wore on. 

As of 11:00 GMT, the prices of WTI and Brent were at $79.48 and $84.56 respectively.

The OPEC+ announced on Sunday that they were going to cut down on production as a ‘precautionary measure’; it coincided with the Chinese factory data, released 24 hours earlier, that showed the manufacturing activities took a dive in March for inexplicable reasons.

Up until a few hours before the abrupt announcement, the OPEC+ had been maintaining the polar opposite: there would not be any production cuts.

The move, as it turned out after a few days, did not excite the markets; nor did it push the prices up to unsustainable levels, estimated by some analysts as a hike by at least $10. 

On the contrary, as the initial puff died down, the prices clearly started showing the signs of creeping into static territory.

Oil price April 6

The move, on the other hand, has resulted in unintended consequences: for instance, there are reports that crude oil stocks are growing in the major Middle Eastern exporting countries, despite the West turning their back on Russian oil imports; in this context, the data on the Chinese factory activities for March may have come as a form of shock, for the oil producers in the Middle East in particular and those beyond the region, including Russia, in general.

In addition, the global economic outlook seems to be far from in complete recovery mode; feeble economic activity inevitably leads to cautious optimism and low consumption of oil and related products in south Asia and south Asia, for instance,  just reflects the growing concerns in the regions. 

The Biden administration that just branded the move by the OPEC+ as  ‘not advisable’, may have breathed a sigh of relief at the prospect of static prices despite the production cuts. 

Since the impact on the US consumers due to high energy prices is already well-known, it could have been a hammer blow for the administration if the prices went up, following the immutable demand-supply paradigm, especially when the political opponents pick on them over ‘mishandling’ the energy crisis.  

In order to keep the oil prices at the current levels, the US has been releasing stocks from its own SPR – Strategic Petroleum Reserve – for months, getting some feeble backing from its allies. Inevitably, it has fallen to record lows, as a result; it is estimated to be at its lowest since 1983. 

In short, the US cannot keep releasing the oil from its SPR for very long, as the latter is meant to be used only in exceptional circumstances, such as local or international oil disruptions due to wars and critical climate developments such as hurricanes and earthquakes  – not for stabilizing the market prices. 

As you can see from the above graph, the decline in SPR has accelerated, while the replenishing the stocks at current prices is going to be a very difficult task; the US Energy Secretary has already admitted that it was the case. 

The rapidly evolving  developments in the energy sectors come at a time , when the so-called de-dollarization moves gather momentum in the Middle East – and elsewhere, incessantly promoted by both China and Russia; it is highly unlikely that the US can use strong-arm tactics to rein in the Middle Eastern suppliers anymore – at present. 

The recent Freudian slip by Marco Rubio, the influential Republican Senator, on the ‘decline of US dollar hegemony’ reflects the way the new developments reverberate in the corridors of power in the US.

Much to its horror, events do take place, literally, on its doorstep: Brazil and China, for instance, agreed to conducting their massive trade and financial transactions directly, exchanging Chinese yuan for Brazilian real and vice versa, instead of using the US dollar for financial settlements for their trade, after putting months of speculation to rest. 

The US dollar, however, is not going to lose its importance when it comes to international trading anytime soon and wishing otherwise is going to be in the hypothetical realm for the foreseeable future; yet, there is no room for complacency – as far as the US is concerned.  

As for the crude oil markets, the US failed to force the Middle Eastern suppliers to produce more oil for the markets last year, despite repeated attempts to do so; a hastily-arranged trip by President Biden to Saudi Arabia did not cut any ice either.  

The widely-reported frosty relationship between the Saudi Crown Prince and President Biden, meanwhile, does not help mending the ties between the two old allies in the very near future. 

By removing the Patriotic missile batteries from Saudi Arabia last year, when it was constantly under attack from Houthi drones and missiles, the Saudis were left in a panicky lurch, forcing them to borrow them from Greece for their own protection. 

The speed at which Saudi Arabia and Iran, its regional foe, got into the reconciliation mode with the blessings of China, in this context, is perfectly understandable, despite the two regional powers being at the loggerheads for years.  

The Iranian factor may have been something that the US cannot politically digest easily in light of Iran’s growing influence in the region militarily; a top Iranian general recently boasted that due to its military power, the US aircraft carriers were stationed more than a thousand miles away from the Persian Gulf region!

The sudden visit by Bill Burns, the director of the CIA, to Saudi Arabia in order to highlight the significance of cooperation of intelligence sharing, shows how seriously the US takes the recent developments on the political front, although it is a bit too late for a realistic reversal. 

In another significant development in the Middle East, meanwhile, Iraqi federal government and the Kurdish regional government came to an agreement over the distribution of the commodity – and its revenue – in a mutually acceptable way. 

Since Iraq is the second largest producer of crude oil, the move will make sure the flow of crude oil to the markets without serious disruptions from the region, where the presence of volatility is as certain as the desert heat.

In addition, the growing closeness between Iran and Saudi Arabia – with China being the strong link – may help the former to find a way for its oil to the markets in due course too, despite the existing sanctions. There are reasons to believe that it is inevitable.

Being in an alliance, vehemently opposed to the war against Ukraine, for instance,  failed to stop Japan from buying oil from Russia. Neither did Europe in getting Russian oil via Indian refineries, according to the Indian media. 

All in all, there is no sign of a supply crunch in the crude oil markets at present. It is not bleak in the near future either. The stubborn reluctance of oil prices to heading up on price charts, despite significant production cuts, just reflects that simple reality. 



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Oil price keeps falling as the influence of Chinese spark on the wane!

The price of crude oil continues to fall as the increased demand from China did not buckle the trend, something that was anticipated by a large number of analysts. Falling banking stocks in Europe over the state of Credit Suisse dealt a further blow to the beleaguered markets this week.

In addition, the worries over the health of the global economy as a whole weigh heavily on the prevailing sentiment that hardly gets a boost when interest rates are rising and a string of layoffs in certain sectors is on the rise. 

The collective failure to tackle the energy crisis in its infancy, after the pandemic, is clearly at the heart of the problem. The outbreak of war quite unexpectedly in Ukraine made the matters worse, as a key player in the energy sector, Russia, was at the forefront. 

The global energy crisis led to the inflation spiraling out of control, which in turn diminished the spending power of people, both in the developed and developing world. The failure by Amazon to meet the sales targets and incurring a net loss of whopping $2.7 billion in the fourth quarter in 2022 for the first time since 2014, clearly indicate that the consumer apathy, indeed, is real.   

In these circumstances, investors turned to closely watching  the performance of the Chinese economy, the world’s second largest economy, in order to sniff out a bullish catalyst. Although China appears to be growing, judging my its own Manufacturing Managers’ PMI index, the heightened industrial activity has not yet resulted in a significant boost for the demand of crude oil. 

On one hand, China openly imports oil from Russia at discounted prices, along with India, depriving the traditional sellers in the Middle East of the opportunity to sell the commodity in large volumes. 

On the other hand, as reported by multiple media outlets, a shadowy fleet of tankers are at work in the high seas in order to make sure crude oil ultimately reaches where it is in great demand! That means the markets are awash with the commodity, despite the warnings to the contrary. Even Bloomberg confirmed that was the case.

The demand for crude oil in the US, the world’s largest consumer – and producer, of course – meanwhile, has not picked up. On the contrary, the inventories are growing again, as confirmed by both the API, American Petroleum Institute and the EIA, US Energy Information Administration, this week; the builds are not trivial. 

The falling gas prices, meanwhile, do not appear to be letting crude oil prices go above $80 a barrel, even if the other perceived factors are in favour of it. It is highly unlikely that the price of natural gas will reach a significant level in light of warming temperatures in the northern hemisphere; in addition, there is plenty of gas in the markets too. 

The price of crude oil went down almost by $10 last week.

Completely in line with the trend, as expected, the rig count in the US has gone down as well.

Oil rig count

As of 12:30 GMT, the price of LNG, liquified natural gas, was at $2.20. If it goes below £2.00 – at this rate – it is going to be a paradigm shift in the sector and inevitable consequences remain to be seen. 

On political front, the warming relations between Saudi Arabia and Iran, meanwhile, is a factor that cannot be ignored, when you take into account the developments in the oil sector.

Iran, a major oil producing nation in the Middle East, is under severe Western sanctions and the Saudis show an interest in investing in Iran. The finance minister of the Kingdom was equivocal, when he said that the investment activities would happen very quickly, after signing the agreement, brokered by China. 

Analysts are closely monitoring whether such a move will include the investment in oil and gas sector as well. At present, Iran is not allowed to sell its oil in international markets legally. It, however, has been boasting that its oil revenues are growing every year, despite the sanctions. 

If Iran can potentially bring in more oil to the markets in order to shore up its battered economy by virtue of its recently-kindled relationship with its Sunni foe in the region, it will not go down very well with Washington – or with the West for that matter. 

The Washington’s influence in the region, however, has been on the wane since President Biden came to power. The US has made it clear it would not get involved in ‘endless wars’, a concept coined by President Trump when he was in power. That means it is highly unlikely that the US would fight in the region on someone else’s behalf, even if the latter is an old ally. 

As this was the case, Saudis must have taken the opportunity to repair the ties with Iran for the own security of the former: up until last year, The Houthis from neighbouring Yemen, blessed by Iran militarily and politically, had been hitting Saudi oil facilities almost daily with explosive-laden drones and missiles. 

The only defense against the threat was the US Patriotic anti-missile system that used to shoot down most of them, but not all. When the Saudis did not increase the production of oil, as the US requested it to do so, in order to bring the price down, the US removed the Patriotic batteries from the Kingdom as a metaphorical slap in the face, leaving it fully exposed to the threat; Saudis were forced to borrow Patriotic batteries from Greece to keep the threat at bay – as the last resort.

Since there was no change in heart from the US over the issue, the Kingdom may have turned to Iran, extracting some inspiration from the proverbial cliché, ‘your enemy’s enemy is your friend’. Iran has clearly used its influence over the Houthis to stop attacking Saudi Arabia recently and there are no drone attacks against the Kingdom anymore. 

The long-term survival of the loyalties in the region, however, are not guaranteed, even if the mediator happens to be the major economic power in Asia, China; Sunni Arabs and Shite Iranians do not see eye to eye to on many issues, even when there was relative peace in the region. This may be a calculation that the US makes, when the latter cannot absorb the new reality in its entirety. 

All in all, the crude oil markets, exactly like the tankers that carry them in the high seas, are swaying from side to side in the absence of clear market indicators to get their bearings right. 

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Has the oil price found the direction – finally?

The price of crude oil, which almost mimicked a turbulent whirlpool in a swollen river for the past few weeks, finally seemed to have found a certain sense of direction.

For three successive weeks, it has been rising despite the endless gloomy, economic news that has cast an ominous shadow across the globe: the unprecedented interest rate hikes, rampant inflation, stagnation of the tech sector and the relative apathy of consumers for spending, to name but a few.

Against this backdrop, the frequent, random lockdowns by China, the world’s largest importer of crude oil, hardly helped resurrecting the sentiment in the oil sector.

There are, however, encouraging signs that China is finally relaxing their rigid Zero-Covid approach in order to minimize the inevitable, collective economic cost associated with it; the reported relaxation of the curbed imposed on air travel over Covid-19 is a case in point.

In another development, Saudi Arabia, meanwhile, reduced the price of crude oil for Asia this week. The announcement came hot on the heels of an interview given by the Iranian ambassador to India on Friday, in which the latter said that Iran was willing to sell oil to India, the world’s third largest importer of oil,  if the latter could get round the US sanctions imposed on the former.

Since India managed to import oil from Russia despite the displeasure of the US over the issue, analysts believe India may turn to Iran too, in order to look after its own economic interests first – perhaps at the expense of  its exiting, strong ties with Iran’s foe in the region, Saudi Arabia.

The development generated a greater buzz in political circles, because of a report in the Wall Street Journal about an ‘imminent’ attack by Iran against Saudi Arabia, citing Saudi intelligent sources. 

It did not materialize in 48 hours as predicted; nor did it alarm the US allies to issue a rallying cry to assemble what President George Bush Jr used to call, a ‘Coalition of the willing’ in similar circumstances.

It is highly unlikely that Iran, which is in the middle of an unprecedented movement of protests by women over their rights, is in a position get involved in a war with Saudi Arabia – or any other country for that matter – which manages the two holiest sites in Islam at Makkah and Medina.

After a few days of silence, Iran scoffed at the report, while the Saudis kept mum about it.

The vulnerability of Saudi Arabia, however,  when it comes to defending its oil facilities has been a hot topic in Washington, because the Biden administration and the Saudi royal family, especially the Crown Prince,  have a frosty relationship that could determine the defense corporation between the two allies. 

The recent production cut by the OPEC+ dealt a serious blow to the relationship that had already been under strain for months. The US vowed a strong response in return, without specifying what that could be, leaving it to wild interpretations, one of which, of course, is the potential removal of anti-missile systems from the Kingdom.

With the US midterm elections just 3 days away, the rising fuel costs and the inevitable inflation that stems from it can still affect the outcome. 

In this context, if the Democrats suffer at the ballot box, the loyalists of the party will not find it difficult to identify the scapegoats. 

All in all, the stakes cannot be higher for Saudi Arabia if the price of oil keeps rising on the grounds of supply woes, partly fueled by the production cuts. 


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