$100 Oil to Tighter Markets: Here’s What Analysts See After OPEC+ Shock Cut

(Bloomberg) -- The decision by the Organization of Petroleum Exporting Countries and its allies to slash its oil output came as a huge surprise to the market, given earlier rhetoric from group leader Saudi Arabia that it would stand pat on production. The move has brought concerns around inflationary pressures back to the fore, adding to worries that higher prices and an aggressive monetary tightening by central banks could tip the global economy into recession. 

The White House has described the OPEC+ decision as ill-advised under current market conditions, and added that the US will work with producers and consumers to manage gasoline prices for Americans.

Here’s what analysts are saying about the shock OPEC+ production change:

Goldman Sachs Group Inc.

“OPEC+ has very significant pricing power relative to the past,” analysts including Daan Struyven and Callum Bruce said. “Today’s surprise cut is consistent with their new doctrine to act pre-emptively because they can without significant losses in market share.”

This, combined with the extension of the Russian production cuts, led the Wall Street giant to raise its Brent oil forecast to $95 a barrel for December this year from $90 earlier, and to $100 for December 2024 from $95.

Unlike during the previous OPEC+ cut in October, the momentum for global oil demand is positive amid a strong recovery in China and resilient refining margins, Goldman added.

Bank of America Corp.

“Any unexpected 1 million barrel per day change in supply or demand conditions over the course of a year can impact prices between $20 and $25 per barrel,” said Francisco Blanch, head of commodity and derivatives research at Bank of America.

“OPEC is no longer afraid of a major US shale oil supply response if Brent crude oil prices trade above $80 per barrel, so cutting volumes to push oil prices higher does not carry the same risks it did five years ago,” he said.

Still, it’s unclear how much of the planned cuts will result in actual volume reductions, given that OPEC has historically failed to fully implement agreed cuts, he said. BofA maintains its Brent forecast of over $90 a barrel in the second half of the year.

Citigroup Inc.

“OPEC+ resumed its recently-abandoned decision to become the ‘central bankers’ of oil,” Citi analysts including Ed Morse and Francesco Martoccia said. 

“Given extremely low managed money positioning, low open interest and high volatility, the markets can expect a price overshoot just as Fed tightening and banking turmoil led prices to fall two weeks ago far more than balances warranted.”

RBC Capital Markets LLC

The surprise cut by OPEC+ could result in an actual reduction of about 700,000 barrels a day in output despite the headline figure being around 1.65 million barrels a day, according to RBC analysts including Helima Croft and Christopher Louney.

Still, the move can be read as a signal that Saudi Arabia and its OPEC partners will seek to short-circuit further macro selloffs. The Saudis have expressed clear concerns about aggressive Federal Reserve action, macro uncertainty, and what’s been seen as an overly bearish bias in the market, they said.

ANZ Group Holdings Ltd.

The probability of reaching $100 before the end of the year “certainly has increased following these measures,” said Daniel Hynes, ANZ’s senior commodity strategist, on Bloomberg Television. 

“Like the rest of the market I was quite surprised by the move,” he said. “This measure does send a pretty strong signal to the market that they’re going to support prices.”

Commonwealth Bank of Australia Ltd.

The announced cuts from OPEC+ will amount to “about 1.1% of global supply in the next two months and about 1.6% of global supply in the back half of this year,” said Vivek Dhar, Commonwealth Bank of Australia’s director of mining and energy commodities research.

The eight countries planning to shave production do have the capacity to do so, he added. “So we are talking north of one million barrels a day that can be an actual reality,” Dhar said. “People should be paying attention to these cuts because they can actually be realized.”

Skandinaviska Enskilda Banken AB

It’s “easy to cut when there is limited risk for loss of market share to US shale oil as growth there slows,” said Bjarne Schieldrop, SEB’s chief commodities analyst. “More market power to OPEC+ and higher oil prices is the natural consequence of fading US shale oil growth.”

The cuts will help to drive Brent faster back to the $100 per barrel level as global jet fuel demand revives, he said.

“We have previously argued that OPEC has a lot of ‘dry powder’ in terms of yet unused potential for further production cuts,” Schieldrop said. “This still holds true even after the latest cuts. The consequence is that there is limited downside price risk.”

Vanda Insights

“The move has the potential to push the market into a deficit in the second quarter, versus earlier expectations of a surplus,” said Vandana Hari, Singapore-based founder of oil consulting firm Vanda Insights. 

“Higher prices may curtail some demand for crude as well as exacerbate the stubborn inflation that central banks are trying to combat, adding to recessionary risks,” she added.

--With assistance from Natalia Kniazhevich, Alex Longley and Elizabeth Low.

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