Crude oil prices have settled into a rangebound trading pattern following a surprise announcement by OPEC+ producers to cut oil production by 1.16 million barrels per day (bpd) starting May 1. This move caught the market off guard, causing a significant 8 percent increase in oil prices on the first day of business.
Although some analysts predicted further price increases, crude oil prices traded within a band of $85-$87 per barrel in the days following the announcement before shedding some of its gains after the International Monetary Fund (IMF) lowered its global economic growth forecast.
On April 2, official Saudi media reported that the kingdom, along with the United Arab Emirates, Kuwait, Oman, Algeria, Gabon, and Kazakhstan, would make “voluntary” production cuts amounting to 1.16 million bpd.
Russia, grappling with multiple sanctions, planned to cut oil production by 500,000 bpd from March to counter the price cap imposed by Western countries on its oil exports. This brought the total cut to 1.66 million bpd. However, Energy Intelligence reported that Russian output decreased by only 250,000 bpd in March.
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OPEC+ is a coalition formed in 2016 between the Organization of the Petroleum Exporting Countries and non-OPEC Russia. Together, the 23-member group controls roughly half of global oil supply, and their collective or coordinated decisions can move the market. The unexpected Sunday announcement, when markets were closed, had a strong impact.
Speculators hit hard
Speculators, often blamed by OPEC ministers for price volatility, were among the most affected by the recent surge in oil prices. Traders who had bet on falling prices incurred losses.
The decision by OPEC+ producers to cut oil production now rather than wait for a formal meeting in June signaled a shift in market dynamics, prompted in part by concerns about China’s demand growth. However, the latest OPEC Monthly Oil Market Report published on April 13 maintained its forecast for 2023 oil demand growth at 2.3 million bpd, with Chinese demand expected to rise by 800,000 bpd in the third quarter.
In October, producers had already taken pre-emptive action to cut quotas by 2 million bpd and maintain them until the end of the year. The new quotas came into effect in November and were meant to last until the end of 2023.
The October cut differed from the recent supply reduction. The previous agreement applied to quotas rather than actual supply, and some producers struggled to meet their allocations. As a result, output from the 19 producers bound by quotas had been lower than the group target, with an estimated shortfall of 2.2 million bpd in March according to the IEA.
Quotas versus actual supply reductions
After the 2 million bpd quota cut in November 2022, the OPEC+ production ceiling was set at 41.9 million bpd until December 2023. However, the IEA’s estimate suggests that the actual production by the 19 member states was 39.63 million bpd in March.
The latest production reductions will be made by the core Gulf countries, which have been producing at quota, making these real cuts. The lower supply increases the spare capacity available, which provides some comfort in a tight market. The IEA’s calculations indicate that Saudi Arabia and the UAE hold around 70 percent of the group’s effective spare production capacity, which stood at 3.7 million bpd in March.
OPEC and the IEA have forecast a tightening market in the second half of the year as global demand, mainly from China, picks up. According to the IEA’s April Oil Market Report, global oil production is expected to reach a record 101.9 million bpd, slightly higher than the previous month’s estimate of 101.1 million bpd, with China accounting for more than half of this growth.
“Our oil market balances were already set to tighten in the second half of 2023, with the
potential for a substantial supply deficit to emerge,” the IEA said. “The latest cuts risk exacerbating those strains, pushing both crude and product prices higher. Consumers
currently under siege from inflation will suffer even more from higher prices, especially
in emerging and developing economies.
Back to 100 oil?
Some analysts predicted that crude oil prices would reach $100 per barrel or more after the production cut was announced. They believed this could exacerbate global inflation, which is still a concern for the global economy.
“The days of OPEC+ acting as a global ‘oil federal reserve’ are behind us. Rather, key OPEC+ leaders are focused on what they perceive to be in their short- to mid-term interest. Clearly, today, that is pushing for high prices. Just how high is unclear, but our balances tell us we must now be ready for a return to $100/bbl+,” consultants FGE said in a note to clients.
Prices moved above $87 per barrel on April 12 after U.S. data showed lower-than-expected inflation and expectations that the Federal Reserve might ease monetary tightening. However, they have since fallen back but were trading above $80 per barrel on April 24.
Assuming that the oil producers’ motive was solely to increase prices would be oversimplifying the situation. In mid-March, prices had dropped to $71 due to concerns about a potential banking crisis but were on the path to recovery when the decision was made to adjust supply.
According to OPEC, the recent production cut was intended to balance the market. OPEC’s Joint Market Monitoring Committee, which convenes monthly to review market developments and provide recommendations, released a statement on April 3, the day following the cut’s announcement. It stated that the measure was a “precautionary step aimed at supporting oil market stability.”
This did not stop speculation in industry circles that other factors were at play. Some have suggested that failure by the U.S. to authorize a repurchase of oil released from the strategic petroleum reserve, slower than anticipated Chinese demand growth, or other geopolitical considerations may have played a role.
Saudi Arabia and its oil producer cohorts are having to manage a market that is fraught with uncertainty. The voluntary nature of the cuts provides them with leeway should market conditions change. In its latest report, OPEC pointed to “the potential challenge to global economic development, including high inflation, monetary tightening, stability of financial markets and high sovereign, corporate and private debt levels.”
It added that in view of “uncertainties surrounding current oil market dynamics,” several countries had announced voluntary adjustments to support the “relentless and determined effort” by OPEC+ to support market stability.
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