BackCrude oil prices surged on Monday following an unexpected commitment by Opec+ producers to reduce output by 1.16 million barrels per day beginning in May.
The decision came as a surprise, as the group of 23 oil-producing nations was expected to maintain agreed-upon production levels during their Monday meeting. Last month, oil prices dropped to their lowest point in over a year due to a banking crisis in the US that spread to Switzerland, resulting in the collapse of four banks and a widespread sell-off in financial markets.
The announcement of voluntary production cuts until the end of the year was made by Opec+ members, including Saudi Arabia, the UAE, Iraq, Kuwait, Oman, and Algeria, with the aim of supporting the oil market's stability. Saudi Arabia, the world's largest oil exporter, will reduce its output by 500,000 barrels per day as a precautionary measure.
Other Opec+ members announced their respective production cuts as well, with the UAE cutting 144,000 bpd, Iraq 211,000 bpd, Kuwait 128,000 bpd, Algeria 48,000 bpd, Kazakhstan 78,000 bpd, and Oman 40,000 bpd. Additionally, Gabon will voluntarily cut 8,000 bpd, and Russia will continue its 500,000 bpd cut from March to June until year-end, resulting in a total output reduction of over 1.65 million bpd.
It’s expected that at least 1% of the global oil supply could be cut short starting in May, which may result in oil prices increasing by $10 per barrel, according to various analysts.
Goldman Sachs recently revised its oil price forecasts for 2023, expecting Brent to trade at $95 a barrel by year-end and $100 in 2024. The bank cited Opec+'s significant pricing power due to its elevated market share, inelastic non-Opec supply, and inelastic demand.
The International Energy Agency predicts a sharp rise in global oil demand this year, driven by increased Chinese demand and a recovery in air traffic. Goldman Sachs anticipates China's economic reopening and domestic demand recovery to benefit the global economy, potentially boosting world GDP by approximately 1% in 2023 and leading to a rally in oil prices.
Clay Seigle, Director of Global Oil at Rapidan Energy Group, sees this as a proactive measure to avoid a situation similar to 2008 when the organization's delayed response led to oil prices collapsing amidst the global financial crisis.
This OPEC+ decision could be viewed as a strategic move by the group, as they acted preemptively to avert the development of a substantial surplus in the market. This would be particularly important if there is a recessionary environment or if oil demand growth this year falls significantly below the predictions made by agencies and general consensus.
The challenge lies in distinguishing between financial expectations and actual physical supply and demand. Some argue that the risk is not related to physical supply and demand but rather to macroeconomic factors. This suggests that GDP may slow down and major economies could enter a recession, which would have a considerable impact on global oil demand.
