What's up with OPEC+?
Ayesha's thoughts ahead of the OPEC meeting and whether we get production cuts
There’s a lot of hype surrounding this month’s OPEC+ meeting that’s being held in Vienna on Sunday, June 4. The fact that the committee is meeting in person is leading to rumors that something big is coming - like another output cut announcement.
To make matters worse, yesterday we got news that Bloomberg, Reuters and The Wall Street Journal have not been invited to attend the press conference that takes place after the meeting. The Financial Times and several other Trade Publications however, have received an invite.
This is leading to more speculation that the OPEC+ will be making some kid of big decision and they want to control the dissemination of information.
Be that as it may, at this point it’s all conjecture and none of us know what’s coming. despite the rumors, all we can do is speculate as to whether there will be a production cut announced.
Let’s, however, weigh in on what the current situation is and what may happen.
Some of the rumors have been fueled by the recent comments made by the Saudi Oil Minister, Prince Abdul Aziz, who has been very vocal about the speculation that’s been pushing the price of oil lower.
Short sellers have been piling on and if you look at the current positioning, there’s very little meaningful long positioning. In fact, early May saw the highest level of short positioning in crude oil - as high as the start of the pandemic in 2020 when oil prices collapsed.1
Soon after the production cuts were announced in April 2023, the price of Brent and consequently WTI soared. Brent is usually what the OPEC+ is concerned about while WTI is US oil. Both tend to move in tandem with a spread of about $3 to $5 per barrel, with Brent being higher.
Now, I’ve been saying this for a while that the average price of Brent needs to be above $75/barrel for the OPEC countries to meet their budgets. Recent estimates from the IMF suggest that this may now be as high as $88/bbl for Saudi Arabia to meet their ambitious growth plans. This being referred to as the OPEC put!
Unfortunately, the price of oil hasn’t held up. Brent dropped -10.7% in May and WTI dropped -11.3%, all during a time when the cuts were meant to have kicked in.
But what’s been keeping the price of oil subdued? For one, we understand that the world is looking at a potential recessionary environment and lack of demand. But, that’s not all it is.
Read on to find out more and what we may expect to hear in terms of production cuts from Sunday’s meeting.
Debt Ceiling
Obviously, the issue with the Debt Ceiling debacle hasn’t been helping oil prices either. Back in 2011, when the Debt Ceiling was called into question, we saw a similar situation with oil prices coming under pressure.
If you look at oil today, it’s soaring - mostly on the Debt Ceiling deal passing the House vote.
Russia
The issue with Russia now is a tricky one. The Russians were meant to reduce production at the start of the year. But, seeing as how they’ve been able to sell oil to India and China directly, they didn’t actually reduce production as they should’ve, which didn’t have desired effect of increasing oil prices. It’s only May 2023 that they actually reduced output by 500,000 barrels. This did not bode well the rest of the OPEC+ members.
Global Oil Demand
When the OPEC+ announced cuts last time around in April, it was predicated on the drop in global oil demand and they are not far off. Global goods demand has reduced significantly as we see in the global manufacturing and production numbers.
According to Goldman Sachs, services GDP actually drives oil demand far more than goods, we’re still seeing a net decrease in demand mainly due to seasonality - warmer than usual weather.
But, there are several factors here that could mean a continuation of the drop in demand:
The uplift in services due to the reopening of the world after the pandemic is waning. Travel and leisure will start to slow.
China’s recovery isn’t going as planned. There was an initial boost of activity where people traveled and started spending but, that’s beginning to slow again - partly due to fears of Covid coming back.
Global demand for goods has dropped and with China being a major producer of goods, we’re seeing a slow down in production activity in China.
SPR refill
There’s certainly been a lot of controversy surrounding the energy policies implemented by the US. For the OPEC, the continuous Strategic Petroleum Reserve (SPR) releases that drove down prices was very irritating. They released an additional 26 million barrels in May.
After selling more than 200 million barrels of crude from the SPR last year, the U.S. Administration has left the strategic petroleum reserve at its lowest level since 1983, at 372 million barrels of crude. 2
That’s a lot of barrels. And now when it’s time to refill the SPR, the US has announced the first tranche of only 3 million barrels to be purchased for delivery in August.
This adds to the frustration because it means that prices will not increase much if this is how gradually the US will refill the SPR.
Closing Thoughts
The news seems to suggest that it was the Saudis who decided not to issue the invites to the select media agencies. Truth be told, we don’t know what’s going on there but, it would seem like they are trying to play hardball. I think I’ve laid out why the OPEC is getting increasingly frustrated with the oil market and what’s going on.
As long as the OPEC anticipates that there will be a global decline in demand and possible global recession, they will try everything in their power to ensure that the price of stays within that range of $75 - $80 / barrel for Brent crude.
With interest rates rising across the world, it’s becoming increasingly more expensive for the OPEC countries to continue their expansion strategies and fulfill capex demand. One way to offset this is to keep the price of oil high to enable sufficient revenues to offset that effect.
Most analysts see insufficient supply and stockpiles for the second half of this year, which could lead to an increase in prices. And if it does, I doubt that the OPEC+ will be too quick to increase production. However, one thing to remember, the cut in April were voluntary cuts - so they are not set in stone and therefore, there is some flexibility there.
Finally, will OPEC announce cuts on Sunday?
It seems highly unlikely that they would announce cuts within 3 months of the prior cut. However, what they could possibly do is formalize the cuts that were announced in April. This would mean that the countries would need to adhere to these quotas more strictly and that would ensure the decline in output and upward pressure on oil prices.
As a reminder, on April 2, they announced a “voluntary” output cut of 1.16million barrels per day. This takes the total cuts up to 3.66 million barrels per day3 or approximately 3.7% of oil demand.
Reports from Standard Chartered; Reuters
3.66million barrels per day = 2million bpd cut announced in Nov 2022 + 0.5 million bpd cut from Russia + 1.16million bpd cut pledged in April
