Market Trends

OPEC+ Cuts Bolster Oil Market Stability Amidst Rising Global Demand

As OPEC+ ministers prepare for their upcoming assessment of the global oil markets, evidence is mounting in favor of the success of the group's recent production cuts.

Following a lackluster start to the year, crude oil prices have begun to display vigor, notably as a result of cuts by Saudi Arabia and its allies, coupled with demand that has outstripped forecasts. While the current market climate does not quite rival the enthusiastic start of 2023 and its $100 oil predictions, prominent financial institutions like Morgan Stanley and leading traders such as the Trafigura Group have started projecting an upward trajectory for oil prices.

Source: Bloomberg calculations using IEA data

Brent crude futures have experienced an approximate 11% climb this year, establishing a steady baseline above the $85 per barrel mark in recent weeks. While this may burden central banks and consumers by potentially derailing earlier triumphs in combating inflation, for Riyadh and its partners, this upswing safeguards crucial income.

Officials from the Organization of Petroleum Exporting Countries (OPEC) are content with the status quo and don't see any immediate need to alter their production strategy come the virtual meeting on April 3 to evaluate the latest round of cutbacks. "The OPEC cuts have been highly effective," mentioned Michael Hsueh, a strategist at Deutsche Bank AG. "It looks like the global market is either currently in deficit or on the cusp of entering one."

Recent weeks have affirmed that the output reductions are exerting their intended influence, as voiced by OPEC+ delegates. In an about-face, the International Energy Agency, which provides advice to major economies, revised their 2024 forecast for global oil markets from an anticipated surplus to a deficit. This shift comes in the wake of OPEC+'s resolution to extend its curtailments until the end of June. Global fuel consumption is topping expectations, and OPEC+'s cutbacks—totalling about 2 million barrels per day—are effectively counterbalancing a deluge of new oil originating from the Americas. IEA's updated outlook marks a significant acknowledgment of the impacts of recent policy decisions within OPEC+.

At CERAWeek, the oil industry's flagship conference in Houston by S&P Global, industry leaders expressed a bullish stance. Top trading firm Gunvor Group Ltd. posited a price surge toward $90 a barrel, while Trafigura shifted the dialog to "upside risk." Both firms project a global consumption increase of around 1.5 million barrels a day in 2023, exceeding historical trends, driven by stalwart U.S. demand balancing out the muted growth in China.

In concert with this sentiment, Morgan Stanley has reinforced its crude price forecasts, whereas JPMorgan Chase & Co. has cast a prediction that Brent may reach the $100 mark, contingent on Russia executing its recent vow to recalibrate its output cuts from exports to production. As per estimates from Standard Chartered Plc, global oil inventories are depleting at an expeditious rate of 1.7 million barrels a day as of last month.

Economic Impact of Rising Oil Prices

With oil prices on an upward swing, consumers might begin feeling the pinch. The AAA automobile club anticipates U.S. gas prices at the pump to ascend to $4 a gallon—the peak level witnessed since the summer of 2022. This scenario could pose challenges to the Federal Reserve as it switches gears toward a more lenient monetary policy. Additionally, the rising prices may also become a contentious issue for President Joe Biden, who is just launching his reelection bid against Donald Trump, since high inflation remains a pressing concern for the public.

"President Biden might confront a difficult summer ahead," warned Helima Croft, head of global commodity strategy at RBC Capital Markets LLC, pointing out the potential peril to energy supplies from ongoing conflicts in Ukraine and the Middle East.

On the other hand, for the 22-member states of OPEC+, the uptick in prices is good news, aiding in the replenishment of government coffers. According to insights from Fitch Ratings, Saudi Arabia is targeting oil prices over $90 a barrel, as Crown Prince Mohammed bin Salman has ambitious spending plans that range from constructing visionary cities to signing top-tier sports talent. Concurrently, Russia under President Vladimir Putin requires financial resources to sustain its conflict with Ukraine.

Next week's OPEC+ Joint Ministerial Monitoring Committee gathering will probably not bring any policy shifts to the table. Instead, the focus will be on how well members are sticking to their pledged reductions. "OPEC is largely pleased with where the market stands and how effective the cuts have been," stated Greg Brew, an analyst at Eurasia Group in New York. "However, OPEC still contends with issues of compliance within its ranks."

Past adherence has been patchy for some members like Iraq and Kazakhstan, who have overstepped their quotas in the initial months of the new accord but have pledged to make amends with additional cuts. Russia presents a challenging case; only recently did it fulfill a year-old promise to trim crude production by about 500,000 barrels a day. With more reductions in production by June on the horizon and increased exports promised, Russia’s refining industry faces additional pressure from Ukrainian drone attacks. This makes the future trajectory of Russia's crude production and exports uncertain.

As Wednesday’s session looms, relatively straightforward, OPEC+ faces a more critical examination at its subsequent ministerial meeting planned for June 1 at the organization's Vienna headquarters. JPMorgan and Standard Chartered are optimistic that OPEC+ can ease the curbs and restore production in the latter half of the year as demand for oil intensifies. Nevertheless, data from the IEA hint at potential market surplus if production is resumed.

"A charged ministerial meeting is on the horizon come June," declared Bob McNally, founder of consultant Rapidan Energy Group and an erstwhile White House advisor.

While Saudi Energy Minister Prince Abdulaziz bin Salman has consistently encouraged the consortium to proceed with caution in reviving dormant supplies, the United Arab Emirates appears ready to use its newly built capacity. In the past, this eagerness has led to friction with Riyadh over its usage rights.

Currently, as stated by Paul Horsnell, head of commodities research at Standard Chartered, "OPEC+ ministers find themselves in a relatively comfortable position." The oil market dynamics appear constructive, with inventory drawdown in the first half poised to propel higher prices in the third quarter.

This article comes with contributions from Salma El Wardany, Fiona MacDonald, and Ben Bartenstein.

(Updates with analyst commentary in the 14th paragraph.)

©2024 Bloomberg L.P.

In conclusion, as the world grapples with macroeconomic challenges and geopolitical uncertainties, OPEC+ has found a delicate balance through production cuts that seem effective at keeping oil markets stable for the time being. Upcoming meetings and potential shifts in global demand will determine the trajectory of oil markets, but for now, the alliance seems content with the results of their strategies.