Further OPEC+ Production Cuts Are Still on the Table

Further production cuts are still on the table when OPEC+ ministers meet in Vienna this Sunday, Rystad Energy Senior Vice President Jorge Leon outlined in a statement sent to Rigzone.

“Macroeconomic headwinds are putting significant downward pressure on oil markets in recent weeks, despite the voluntary cuts implemented by seven OPEC+ countries starting in May, and the group of producers could cut output to support prices in the short term,” Leon said in the statement.

“U.S. shale’s unresponsiveness should be seen as a positive for the group, as OPEC+ could cut production and support prices without the risk of losing market share,” he added.

“However, the impact of higher oil prices on the global economy will weigh heavily on the ministers’ minds,” Leon continued.

High oil prices would fuel inflation in the West right when central banks are starting to see inflation gradually recede, the Rystad SVP noted, adding that this could prompt central banks to continue increasing interest rates, which he dubbed “a detrimental move for the global economy and oil demand”.

“Given all these caveats, the group could decide to maintain production instead,” Leon said in the statement.

“The oil market is expected to tighten significantly in the year’s second half, even if OPEC+ maintains production, prices will likely experience significant upward pressure,” he added.

“The ministers might therefore take a ‘wait and see’ approach and hold off taking any action,” Leon continued.

In the statement, Leon noted that demand forecasts “remain lukewarm at best” and said “maintaining current output could be the most prudent course”.

“Rystad Energy’s real-time global traffic monitoring tool shows that activity has remained flat in the last six weeks compared to 2019,” Leon said.

“Aviation demand paints a gloomier picture, as mobility rates are flat compared to 2019 and stubbornly below 2019 levels since February,” he added.

Another option is for OPEC+ to increase production, Leon highlighted in the statement. He added, however, that Rystad does not believe this is a likely outcome.

“This move would undermine the group’s cohesion, particularly Russia, which would fiercely oppose an increase,” he said.

“Also, the IMF estimates the breakeven oil price for Saudi Arabia in 2023, the group’s kingpin, is $81 per barrel,” he added.

“This year’s average oil price is $77 per barrel, and opening the taps would reduce the average 2023 price even more. In addition, spare capacity in non-core OPEC+ countries is relatively limited,” Leon went on to state.

Weak Prices, Worsening Macroeconomic Sentiment

In a separate report sent to Rigzone this week, analysts at Standard Chartered noted that OPEC+ ministers meet on June 4 against a backdrop of relatively weak prices and worsening macroeconomic sentiment among oil traders.

“Brent is set to average just over $76 per barrel in May, the lowest monthly average since December 2021 and more than $7 per barrel lower than April,” the analysts stated in the report.

“Expectations of a prolonged rate-hiking cycle in key OECD economies have increased bearishness about oil among macro-led investors; while speculative shorts pulled back a little in the latest week, our crude oil money-manager positioning index remains highly bearish at -89.1,” they added.

The analysts stated in the report that the patient approach from OPEC+ ministers would be to keep current targets in expectation of higher prices as the market tightens.

“OPEC crude oil output has fallen by about 1.9 million barrels per day since September 2022, and we estimate that it was roughly equal to the call on OPEC output and inventories in May,” the analysts said.

“We expect the call on OPEC to move higher during H2, leading to significant inventory draws for the next seven months if OPEC output remains flat,” they added.

“The International Energy Agency and OPEC Secretariat forecasts of the call on OPEC in H2 are respectively 0.92 million barrels per day and 0.56 million barrels per day higher than our estimate, implying even larger inventory draws,” they continued.

The cautious approach would be to respond to the concerns of the macro-led shorts and make a further precautionary cut to signal to speculators that any likely macroeconomic downside has already been covered, the Standard Chartered analysts said in the report.

“We think the decision is finely balanced; while we detect no strong appetite among ministers for further cuts, we also detect no appetite to allow macro-led investors free rein to open up the downside for oil prices,” the analysts noted.

OPEC+ Scheduling

Although the OPEC website does not currently show any scheduled event on June 4, a statement posted on the organization’s site in December last year revealed that, at its previous OPEC and non-OPEC Ministerial Meeting held on December 4, 2022, OPEC+ decided to hold its next OPEC and non-OPEC Ministerial Meeting on June 4. A statement posted on OPEC’s site back in April noted that the next meeting of the Joint Ministerial Monitoring Committee is scheduled for June 4.

The next scheduled meeting shown on the OPEC site is the 8th International OPEC Seminar, which is currently set to be held on July 5-6 in Vienna.

A statement posted on OPEC’s website earlier this week highlighted that, during the recent Meeting of OPEC’s Economic Commission Board, OPEC’s Secretary General, Haitham Al Ghais, “underscored the positive contributions made by OPEC Member Countries and non-OPEC oil-producing countries participating in the Declaration of Cooperation to support sustainable stability in the global oil market”.

The ECB is described as OPEC’s economic and technical think-tank, which meets twice a year in advance of the biannual Ordinary Meetings of the OPEC Conference. The ECB regularly reviews market conditions and developments in the world economy, according to the OPEC statement.

To contact the author, email andreas.exarheas@rigzone.com