According to analysts and traders, unexpected new cuts to the OPEC+ group’s output targets could drive oil prices towards $100 per barrel and set the stage for yet another conflict with the West struggling with rising interest rates. The choice undermines Western attempts to restrict Russia’s oil exports while also demonstrating OPEC+ unity in the face of pressure from Washington to sever ties with its Gulf allies that are close to Moscow.
After the Organization of the Petroleum Exporting Countries and their allies, including Russia, announced additional production target cuts of about 1.16 million barrels per day (bpd) from May through the remainder of the year, oil prices increased by more than 6% on Monday. According to calculations by Reuters, the promises will raise the total volume of cuts made by the so-called OPEC+ since November to 3.66 million bpd, or 3.7% of global demand.
OPEC+ was anticipated to maintain production this year after reducing it by 2 million bpd in November 2022. Saudi Arabia claimed that its voluntary production reduction was a preventative step taken to help maintain market stability. Alexander Novak, the deputy prime minister of Russia, stated on Monday that market interference was one of the causes of the cutbacks. According to SEB analyst Bjarne Schieldrop, “the new cuts are supporting that the OPEC+ group is intact, and that Russia is still an integral and important part of the group.”
According to Rystad Energy, the cuts will make the oil market even tighter and push prices above $100 per barrel for the remainder of the year, possibly pushing Brent as high as $110 this summer. UBS anticipates that Brent will hit $100 by June, and Goldman Sachs increased its prediction for December by $5 to $95. Strategic petroleum reserve (SPR) releases as a result of ongoing strikes in the United States and France, as well as Washington’s reluctance to replenish its SPR in the 2023 fiscal year, according to Goldman, may have been the driving force behind the OPEC+ action.
As prices rise, Moscow will likely earn more money to pay for its pricey conflict in Ukraine, upsetting Saudi Arabia and the United States. Relations will be improved, Schieldrop said. The U.S. administration might also claim that attempts to put out the inflation fire will be undermined by higher oil prices, the author continued. According to a representative of a South Korean refiner, the reduction was “bad news” for oil consumers and OPEC was trying to “protect their profit” from worries about a slowdown in the world economy.
According to a South Korean official in charge of refining and a Chinese trader, the supply reduction would increase prices at the same time that weakening economies would reduce fuel demand and prices, reducing refiners’ profits. Since neither of them had permission to talk to the media, they both declined to be identified. According to Takayuki Honma, head economist at Sumitomo Corporation Global Research, tighter OPEC+ supply will also be bad for Japan as it could further increase inflation and weaken its economy.
He continued, “Producing nations reportedly want oil prices to reach $90-$100/bbl, but higher oil prices also increase the danger of an economic downturn and weak demand. However, as China, the world’s top importer of crude, recovers from the COVID-19 pandemic, purchases are anticipated to reach a record level in 2023, while demand from India, the world’s third-largest importer, is expected to stay strong, according to traders.
China and India may be compelled to purchase more Russian oil as Middle East sour crude supplies decline, according to the Indian refining official who refused to be identified because he was not authorized to speak to the media. This would increase income for Moscow. According to him, the increase in Brent prices could cause the price of Urals and other Russian oil products to exceed the limits established by the Group of Seven Nations (G7) in order to reduce Moscow’s oil revenue.
Due to geopolitical concerns, refiners in Japan and South Korea said they were not contemplating accepting Russian barrels and may instead look for alternative supplies from Africa and Latin America. Japan could request more supplies from the United States, but doing so would be costly, according to Sumitomo’s Honma.
Traders are also anticipating the United States’ reaction after it deemed OPEC+’s action unwise. The Chinese trader claimed that the primary goal of the significant unexpected production cut was to reclaim market pricing power.
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