If fully delivered, the newly announced OPEC+ cuts would further tighten an already fundamentally tight oil market, drive Brent towards $100 per barrel sooner than previously expected and push the price to around $110 per barrel this summer.
That’s according to Rystad Energy Senior Vice President Jorge Leon, who highlighted in an extraordinary market update sent to Rigzone that the voluntary cut of 1.15 million barrels per day surprised markets, caused oil prices to rise and fed inflationary fears.
“The voluntary cuts, which the group had has a good track record of implementing, will put upside pressure on prices from a fundamentals perspective, offering support of around $10 per barrel,” Leon said in the update.
“Still, given the current macro environment, the market may interpret the cuts as a vote of no confidence in the recovery of oil demand and could even carry a downside price risk – but that will only be for the very short term,” he added.
“Rystad Energy believes that these voluntary cuts will further tighten the oil market for the rest of the year and could push prices above $100 per barrel and keep them above that level for most of the rest of the year,” Leon continued.
In the update, Leon warned that the anticipated increase in oil prices for the rest of the year, as a result of the voluntary cuts, could fuel global inflation, “prompting a more hawkish stance on interest rate hikes from central banks across the world”.
“That would, however, lower economic growth and reduce oil demand expansion,” Leon said in the update.
In a separate statement sent to Rigzone, Walid Koudmani, the Chief Market Analyst at online investment platform XTB.com, noted that the reduction in supply amounts to over one percent of global output and caused oil prices to increase by more than five percent.
“However, these cuts may suggest that OPEC has concerns about demand outlook, which could impact oil prices in the long-term and may prove to be an important factor in the longer term price trends,” Koudmani said.
“The OPEC+ Joint Minister Monitoring Committee is meeting … [Monday] to provide policy recommendations, and the recent announcements have created uncertainty about their decision which may lead to some additional volatility on the commodity market,” he added.
Adaptive, Agile OPEC+ Group
In another statement sent to Rigzone commenting on the new OPEC+ cuts, Bjarne Schieldrop, a Chief Commodity Analyst at SEB, said, “what we are witnessing is an adaptive and agile OPEC+ group which is able and willing to act ahead of the curve”.
“The recent market turmoil where Brent crude dropped to $70 per barrel probably gave OPEC+ a bit of a scare. They will have nothing of it. The rapidly rising U.S. interest rates and the cracks in the walls of the U.S. and European banking systems has given associations to the global financial crisis. With fears that the banking system will break, the economy will stop, and the oil price will drop,” he added.
In the statement, Schieldrop said it is easy to cut production “when shale oil production growth is muted”.
“There is always a danger that production cuts will lead to lost market share and OPEC is always observant to this risk. But this time around it is not difficult. U.S. shale oil is the only challenger to OPEC+,” he added.
“Bankruptcies, consolidations, and reoriented priorities has changed U.S. shale oil. We are no longer witnessing crazy volume growth in the U.S. Instead, it is actually slowing,” he continued.
“U.S. shale oil drilling rig count has actually declined since early December last year during which the Brent crude oil price has averaged $82 per barrel. The cuts decided this weekend shows explicitly what peak Permian oil production will mean - power back to OPEC+ and higher prices,” Schieldrop went on to state.
The SEB analyst also noted in the report that Saudi Arabia “still has plenty more room to cut”.
“The new cut will bring Saudi Arabia's production cap to 9.98 million barrels per day, only marginally below its 2015-19 average production of 10.15 million barrels per day,” he said.
“Saudi Arabia will produce at its ‘normal’ and comfortable production level with its latest cap-level. This means that it has plenty of room to cut more if needed,” he added.
“We have previously argued that OPEC has a lot of ‘dry powder’ in terms of yet unused potential for further production cuts,” Schieldrop continued.
In the Rystad update, Leon highlighted that the supply cuts are scheduled to start from May, “which coincides with the refinery pre-summer season ramp up and an anticipated refined products demand rebound”.
“Saudi Arabia will shoulder most of the cuts, reducing production by 500,000 barrels per day,” Leon said.
“Other participants are the UAE (144,000 bpd), Kuwait (128,000 bpd), Iraq (211,000 bpd), Oman (40,000 bpd), Algeria (48,000 bpd) and Kazakhstan (78,000 bpd), according to statements from their respective governments,” he added.
“Russia also announced that the existing 500,000 bpd production cut, initially from March to June, will be extended till the end of the year,” Leon continued.
The Rystad VP, who said a significant reduction in output from Russia for the rest of the year was already assumed in the company’s base case scenario, noted that the voluntary reductions are in addition to the current official OPEC+ cuts of two million barrels per day announced back in October 2022.
“The fact that all these countries are adhering to the current OPEC+ quotas, with compliance levels at close to 100 percent, implies that the announced voluntary cuts will also most likely be real,” Leon said.
“From a supply side perspective, the cuts signal the group is willing to defend a price floor well above $80 per barrel and prioritize revenue versus market share,” he added.
“From a demand-side perspective, these cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market,” Leon continued.
Leon stated in the update that these recessionary indicators have been exacerbated by the ongoing strain on the banking industry which he said is weighing on the broader financial sector.
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