A year back, oil was trading north of $100 per barrel. With a deteriorating economic environment taking its toll on oil demand, prices have maintained a broad downward trajectory so far this year. The OPEC+ had no choice but to cut production to mitigate the impact of a global economic slowdown and the banking crisis, to protect their profitability.
The latest OPEC+ session, which concluded on June 4, saw Saudi Arabia announcing a voluntary oil supply cut of 1 million barrels per day (bpd) in July. Terming these production cuts as a “Saudi lollipop,”the Kingdom’s Energy Minister Prince Abdulaziz said they would “ice the cake of OPEC’s efforts to stabilise global crude markets.”Are the latest cuts enough to support oil prices?
ALook Backatthe Recent Cuts
Recessionary fearsdampeningglobal oil demandhas forced theOPEC+nationsto announce severalproduction cutsover the past year.In October 2022,the cartelannounced a 2 billion bpdreduction.Yes, oil did respond. But the gains were temporary to say the least. Oil pricesmaintained a downturntoreacha 15-month low in mid-March 2023.
TheOPEC+memberscollectively cutproductionby1.6 million bpd in Apriland succeeded in liftingoil prices. However,subdued global demand corrected the $9 per barrel increasein less thana week.
Recent historysuggests a very low probability ofSaudi Arabia’s latest move helping to stabilise oil prices.There are, however, other factors to consider.
Assessing the Strength of the De Facto Leader
Saudi Arabiahas long since been the de facto leader of the OPEC.Thelatest cutsplannedwill reduce global supplymeaningfully, but maybe not meaningfullyenough.DespiteSaudi Arabiabeing theworld’s largest oil producer,it contributesroughly10 million barrels a day. Cuttingthisby 10%may prove too little to move the needle.
Also, theOPEC+ hasreiteratedits oil production target of 40.463 million barrels per day for 2024.So, the global supply remained unchanged in the longer term.Against this backdrop, the market sentiment forbothWTI crudeand Brent cruderemains bearish, as can be seen inAcuity’sAssetIQWidget.
What About the True Leader?
We may put sanctions onRussiaanddisagreeits political stance, but it is still the world’s largestexporter of oil totheglobal markets.The country agreed to cutproduction by500,000 bpd in March.However, Russia is focusing on theAsianmarkets, given that it has lost favour with the Western world and is strategically positioned to cater to Asia’s growingenergy demand.
TheEU and G7 together put a $60 per barrel cap on Russian imports, forcingthe oil majorto divert a larger share of itsoutputtotheAsian markets,where the demand is projected to grow through 2023 and 2024.
Also,Russia’s relationship with the OPEC has been rocky.Since the formation ofthe cartel,Moscowhas produced above targeton several occasions. OPEC’sproduction cuts without compliance from Russia put other membersat a disadvantage.
Prospects of a Rally
As of now, the cumulative oil production cuts by OPEC+ stands at4.66 million bpd, or 4.5% of the global demand. Oil prices are at 66% of what they were at the time of the Ukraine invasionin 2022. Despite multiple cuts, oil prices have ranged between$70 and $83 per barrel sinceNovember.
With over 60% of global oil exports, OPEC+canpotentiallydisrupt global oil supply.The Saudilollipopalone may notsweeten oil prices enough.So far, Saudi Arabia’s latest moveseemsnothing short ofa desperateand failingattempt tosupportoil prices.
The Fed’s interest rate decisions, whichtriggerUS dollar movements, will remain key in determining where oil prices are headed.With the US central bank expected to lower its fed funds rate as the year progresses, oil demand may receivesome support.Large drawdowns of US stockpiles could add to the fillip.
Reports of the Eurozone entering recession, with its economy contracting for two consecutive quarters, will keepdemand concerns on the front burner and crude prices in check.
Short term volatility could continue offering attractive trading opportunities. But a more permanent uptrend is unlikely as long asdemandremainssubdued across the globe due to theuncertain macro environment.Don’tbe surprisedto see Brent crude prices ending 2023 below $80 per barrel. WTI crude prices may struggle to breach $78 per barrel.
Prospects of a rally in oil prices is unlikely this year, unless there’s meaningful and widespread economic recovery. All eyes are still on China and India, the world’s #1 and #3 crude oil importers. Chinais gearing up toannounce anotherfiscalstimulus package to spur growth, whileinfrastructuredevelopment continues to beon theIndiangovernment’s radar foreconomic expansion.