OPEC+ surprised the markets with a decision by its largest members to voluntarily cut oil production by about 1.0 million b/d. The cuts will take effect in May and supposedly continue until the end of the year. Crude oil prices have risen and have further to go. This latest move by OPEC+ will not occur in a vacuum, however, and we may see more supply from other countries and maybe even from strategic stockholders. Moreover, the voluntary nature of these cuts bears watching.

Saudi Arabia will cut 500,000 b/d, followed by Iraq with 211,000 b/d, the UAE with 144,000 b/d, Kuwait with 128,000 b/d, and Algeria with 48,000 b/d. The “Plus” countries, Kazakhstan and Oman, will see cuts of 78,000 b/d and 40,000 b/d respectively. The calculation of the cuts seems to be roughly 5 percent of the January and February production levels per country.

The voluntary nature of the agreement removes the burden on the group to negotiate a future increase in production with members that are underproducing their targets. A voluntary cut can be reversed without returning to the full group for approval, further centralizing power within the largest producers. In the meantime, the decision to maintain voluntary cuts demonstrates a solidarity with Russia in light of the price cap..

Tightens Crude Oil Balance and Lifts Prices

Last week, ESAI Energy presented a view on the global crude oil balance, shared in the first chart below. With a healthy surplus in 2022 and the first five months of 2023, oil prices were weak, trending into the mid to high 70s for Brent. This new production cut, to the degree it is implemented, essentially eliminates that weakness, notably just as the U.S. government is selling 26 million barrels from the SPR, a sale that will add about 300,000 b/d to the market for three months. As shown in the second chart below, this production cut will yield a global crude oil deficit in May and a disitnctly deeper deficit in June, July and August. Oil prices have already responded by $4 to $5. Going forward, we expect crude oil prices to be $5-$10 higher than our forecast last week.

More Supply May Respond

We are mindful, however, that this latest move by OPEC+ will not occur in a vacuum. With these higher prices, some of the rigs that have been idled in the U.S. shale sector may find their way back into the field, albeit with some lag in timing. Moreover, we believe Europe will call on Arab Gulf producers for more crude oil this summer in replacement of Russian barrels. The voluntary nature of this OPEC+ decision will be critical at that juncture. Finally, the U.S. and other countries may find it necessary to release more strategic stocks if the higher oil prices rekindle inflation and encourage even weaker economic growth.

In short, the producers and consumers in the global oil market see the world very differently. The consuming governments are looking for ways to diminish inflation, shore up economic activity and help Europe manage the impact of sanctions on Russia. Thus, perhaps more than usual, they would prefer more supply and a lower oil price. The producing countries seem overly concerned with the price decline and apparently want to be clear that they are siding with Russia against the imposition of a price cap on oil trade. As we stated in our forecast last week, 2023 will be a volatile year for oil prices.
Source: ESAI Energy