According to the Saudi energy ministry, the proposed cuts are a “precautionary measure aimed at supporting the stability of the oil market.” With most of the nine members getting close to OPEC+'s production cap, we should see a substantial proportion of the promised cuts materialize. As we already expected Russian production to stay lower for longer, we think the effective drop in supply will be closer to 1 million barrels per day (vs. the announced 1.66mbpd). We continue to see Saudi Arabia and the other OPEC+ members keeping their hands on the oil reins and remaining in control of the market.
These cuts come on the heels of growing concerns over oil demand recovery following the banking sector turmoil, which could weigh on economic activity. It is also possible the surprise cuts were aimed at clearing the buildup of short futures and options positions in recent weeks. Moreover, the group may be seeking to tackle concerns about underinvestment after the Biden administration failed to follow through on its earlier pledge to refill US strategic petroleum reserves if WTI fell into the production cost curve of US shale producers (pledged price level to buy: USD 67–72/bbl; average breakeven cost of USD 62/bbl). Higher prices should prevent US shale producers from cutting investments.
Brent crude oil December 2023 target: USD 130–160/bbl
Upside risks to our forecasts include a large and long-lasting disruption of Russian crude production and destabilizing political events in oil-producing regions like Libya, Venezuela, Nigeria, and the Middle East, which could trigger a sharp drop in supply for a sustained period. A faster-than-expected recovery in oil demand as mobility picks up in China and an even slower production response (i.e., increase) from the US would also be price supportive.
Brent crude oil December 2023 target: USD 40–70/bbl
Downside risks include a deep recession or renewed extended mobility restrictions that weigh on the oil demand recovery. A hard landing for the Chinese economy in 2023 would also pose a downside risk, as emerging Asia is the engine of oil demand growth. Another concern is that capital discipline in the US could start to erode. Also, the return of disrupted oil production in Venezuela and Iran could weigh on prices.
Main contributors- Giovanni Staunovo, Wayne Gordon, Dominic Schnider
Content is a product of the Chief Investment Office (CIO).
Original report - Crude oil: Voluntary production cuts, 6 April 2023.