Some OPEC+ countries have surprised markets with a voluntary cut of 1.15 mn barrels per day (bpd) causing oil prices to rise and feeding inflationary fears
According to Saudi Arabia, the voluntary cut is a precautionary measure aimed at supporting oil market stability.
If fully delivered, the announced cut would further tighten an already fundamentally tight oil market, driving the Brent benchmark towards US$100 per barrel sooner than previously expected and would push the price to around US$110 per barrel this summer.
The supply cuts, mostly to be shouldered by Saudi Arabia, are scheduled to start from May, which coincides with the refinery pre-summer season ramp up and an anticipated refined products demand rebound.
Before the new OPEC+ cuts were announced, Rystad Energy was anticipating the crude oil market to be in deficit to the tune of 1.4 mn bpd between May and August.
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 US$10 per barrel.
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.
These voluntary reductions are in addition to the current official OPEC+ cuts of 2 mn bpd announced back in October 2022 for the period November 2022 - December 2023.
Saudi Arabia will shoulder most of the cuts, reducing production by 500,000 bpd.
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.
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.
However, a significant reduction in output from Russia for the rest of the year was already assumed in Rystad Energy’s base case scenario.
The fact that all these countries are adhering to the current OPEC+ quotas, with compliance levels at close to 100%, implies that the announced voluntary cuts will also most likely be real.
From a supply side perspective, the cuts signal the group is willing to defend a price floor well above US$80 per barrel and prioritise revenue versus market share.
From a demand-side perspective, these cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market. These recessionary indicators have been exacerbated by the ongoing strain on the banking industry which is weighing on the broader the financial sector.
Forward refinery margins are already weaker than prompt margins. The cuts and the resulting crude price action are bound to compress the forward margins and run rates. Refineries are coming out of maintenance and run rates are projected to increase by 3 mn bpd between March to August to prepare for peak summer demand.
Hence, any erosion is crude supply will only make the summer product supply-demand balance tight, with a rally in product prices tracking crude.
Rystad Energy believes that these voluntary cuts will further tighten the oil market for the rest of the year and could push prices above US$100 per barrel and keep them above that level for most of the rest of the year.
ICE Brent front month had declined from over US$86 per barrel in early March to less than US$73 per barrel by mid-March, its lowest since late 2021 amid the recent financial turmoil.
Since then, it has recovered almost halfway, nearly reaching US$80 per barrel at the end of last week.
The anticipated increase in oil prices for the rest of the year as a result of these 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.
