Brent Crude bounced back to $85, and WTI Crude hit $80 per barrel again, as the latest 1.66 million bpd of cuts from nearly half of the OPEC+ members from May through December are expected to tighten the market in the second half of the year.
Analysts, who had just slashed price forecasts in the wake of the banking sector jitters in mid-March, raised their price estimates and started talking about $100 oil again.
OPEC said on Monday that its Joint Ministerial Monitoring Committee (JMMC) meeting “noted that this is a precautionary measure aimed at supporting the stability of the oil market,” using the same wording as Saudi Arabia did in its own announcement on Sunday.
OPEC Controls The Oil Market Although OPEC and OPEC+ never talk explicitly about oil prices and prefer to refer to “stability” when they move to tighten the market with cuts, many analysts believe that the group is defending an $80 floor under prices.
The surprise cut made one thing clear—OPEC is firmly in control of the oil market and has the arsenal of rhetoric, surprise announcements, and actual production cuts to lift oil prices whenever they feel they are not getting enough money for their crude.
American oil executives had already said in early March that OPEC is once again the most influential force in global oil supply – and will be so for the foreseeable future – now that U.S. shale production growth is slowing.
Scott Sheffield, CEO at the largest pure-play shale producer, Pioneer Natural Resources, told the Financial Times just last month, “I think the people that are in charge now are three countries — and they’ll be in charge the next 25 years.”
“Saudi first, UAE second, Kuwait third.”
It was Saudi Arabia, the UAE, and Kuwait who led the surprise cuts, alongside OPEC’s second-largest producer Iraq and another half a dozen OPEC+ producers, including Russia.
While Russia’s extension of its own 500,000-bpd cut until the end of the year was no surprise – analysts had largely baked in a drop in Russian production in view of the embargoes and price caps on its oil – the move from OPEC’s heavyweights came as a surprise. And sent a clear message to the market—we are in charge.
“It is easy to cut production when shale oil production growth is muted,” Bjarne Schieldrop, chief analyst of commodities at SEB bank, said.
“The cuts decided this weekend shows explicitly what peak Permian oil production will mean: Power back to OPEC+ and higher prices.”
Cuts Help Russia, Stick It To Biden
“Apart from supporting prices amid worries about an economic slowdown hurting demand, the surprise production cut also helped throw short sellers under bus,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, commented. Hansen recalled the proverbial promise of Saudi Energy Minister Prince Abdulaziz bin Salman back in 2020, “I’m going to make sure whoever gambles on this market will be ouching like hell.”
The surprise cut also indirectly helps Russia, the leader of the non-OPEC group in OPEC+. A tighter market and higher prices would mean increased prices even for Russia’s discounted crudes, boosting oil revenues for Putin’s war chest.
For the U.S. Administration, higher prices for Russian oil are undesirable, considering that so far, American officials have said publicly that the $60 price cap is working. But more undesirable for the U.S. are higher gasoline prices, especially as the price is set to go up anyway with the start of the driving season. The U.S. cannot do much to tame the price of oil. Shale’s production growth is slow, while the Administration doesn’t have too much room to further deplete the Strategic Petroleum Reserve (SPR).
All things being equal, the cuts could send oil to $100 per barrel in the second half of 2023, many analysts said.
Supply will tighten, no doubt, because the OPEC+ producers who announced the cuts on Sunday are known to have nearly always delivered. The big question is demand. Will it hold with China’s reopening? Or will a renewed hike in energy prices stoke inflation again and force central banks to continue with rate hikes and raise the chances of a hard landing?
“It now appears that OPEC+ would prefer prices to be close to $90 a barrel than $80, which might be ok for them, but could make inflationary pressures for everyone else much harder to subdue,” Michael Hewson, chief market analyst at CMC Markets, wrote on Monday.
Warren Patterson, Head of Commodities Strategy at ING, said, “We will need to keep an eye on whether the aggressive tightening from central banks around the world leads to a stronger-than-expected slowdown later in the year.”
ING on Monday raised its Brent price forecast for the second half of the year to $101 per barrel, up from $97 previously expected.
Goldman Sachs raised its Brent Crude forecast to $95 from $90 at the end of the year.
The cuts are making oil balances look “insanely bullish” for later this year, provided that the global economy holds up, Amrita Sen, founder and director of research at Energy Aspects, told CNBC on Monday. Asked if we will see oil at $100 this year, Sen told CNBC, “I absolutely think we will see a $100 oil, yes.”
But Ed Morse, global head of commodities research at Citigroup, doesn’t see oil prices going anywhere near $100 per barrel, as U.S. supply growth and uncertainty in China’s demand growth path will keep the market fairly balanced.
According to Ed Moya, senior market analyst, The Americas at OANDA, “Clearly, the Saudis were not comfortable with how low oil prices were going and wanted to send a message here.? Energy analysts are going to have to reset any downbeat macro-driven forecast as oil is clearly making a run back towards $100 oil.”
By Tsvetana Paraskova for Oilprice.com