Markets brace for oil price overshoot after Opec+ shock decision
RIYADH, April 3, 2023
The surprise oil production cut from Opec+, abandoning previous 'wait-and-see' assurances, has tightened market balances into H2 2023 and reinforced the impact of an expected increase in demand from China, according to MUFG, a global financial group.
There are two immediate takeaways from this shock move. First, given acutely low managed money positioning, low open interest and high volatility, markets can expect an oil price overshoot just as
Fed tightening and banking turmoil led prices to fall in March far more than balances warranted, it stated.
Second, the implications for oil prices are far greater than for annualised inflation (given large base effects in Q2 2023).
These Opec+ cuts will likely have a high degree of compliance, stated the expert.
Unlike the previous iterations of quota reductions most of the headline number are likely to translate into an actual drop in physical supply, warned MUFG.
This time, the production cut responsibilities are primarily shared among member countries which are at least close to meeting their target levels, if not for Russia – incidentally, the five largest Opec+ producers bear the brunt of the total: (i) Saudi Arabia (500k b/d); (ii) Russia (500k extension of existing cut); b/d); (vi) Kazakhstan (78k b/d); (vii) Algeria (48k b/d); (viii) Oman (40k b/d); and (ix) Gabon (8k b/d).
Excluding Russia, the countries included in these round of quota revisions overproduced by 160k b/d in February versus its target levels. This pales in comparison with the 1.15 million b/d drop in their target output level effective from May.
Although Russia is likely to continue underproducing significantly against its target levels, the country could still deliver a sizeable proportion of the cuts.
Early estimates suggest that Russia’s oil supply has fallen by around 300k b/d in March, it added.
"We base case Opec+ delivering over 1.2 million b/d in actual supply cuts, out of the 1.6 million b/d pledged output reduction. If Russia intensifies its efforts to adhere to the Opec+ deal, all 1.6 million b/d of quota cuts could be met," said an analyst at MUFG.
Non-participating Opec+ member countries could see a slight increase in supply, but they are not likely to have any significant impact.
"Critically, the cuts will not only further tighten fundamentals – lending support to our bullish price forecasts – but also help remedy the large exodus of oil investors that has left prices underperforming both fundamentals and other cyclical asset classes," he added.
The rationale that Opec+ articulated to the market that was behind its cuts centred predominantly on the demand-side. The group accentuated that heightened macro concerns necessitates a proactive approach in order to stabilise the market, stated the analyst..
What’s more, they maintained that the world is running worryingly thin on available spare capacity, and that oil prices need to be higher, particularly in the context of other energy prices (such as natural gas) in order to incentivise investment that the space has been starved off due to the ESG-induced pivot towards a reallocation of capital away from fossil fuels for nearly a decade, he added.-TradeArabia News Service
