The decisive factor behind the voluntary production cut by some OPEC+ members was the positioning data and the rapid move to a bearish speculative extreme amid the market turmoil that followed the collapse of SVB .
That’s what analysts at Standard Chartered think, according to a new report sent to Rigzone by the company, which noted that there were 228.9 million barrels of speculative net sales of crude oil in just two weeks. That was a faster rate of selling than at the start of the pandemic lockdowns, including 113 million barrels of new speculative shorting, analysts noted in the report.
“Evidence of rapid speculative selling, combined with the effects of the options market, has often raised concerns for major producers and sometimes led to unexpected cuts; we see the latest surprise as fitting this pattern,” the analysts said in the report.
“The message from Saudi Arabia in particular is that it was naïve for traders to drop Brent to $70 a barrel and not wait for a response from producers who saw no fundamental justification for the drop,” they added.
While the desire to crack down on speculative shorts and discourage underpricing was a key factor, there is also a fundamental context for the cuts, analysts noted in the report.
“There was a significant supply surplus at the end of 2022 that continued into the first quarter,” the analysts said in the report.
“Inventories are currently 200 million barrels higher than at the start of 2022 and 268 million barrels higher than the June 2022 low. Before the cuts, we estimated that inventories … would fall, but only slowly. If they maintain the cuts throughout the year … the construction in the last two quarters will disappear in November and the same will be achieved by the end of the year if the current cuts are reversed in October,” the analysts added.
“We believe that a move that reverses an unexpected inventory build, as well as a correction of a speculation-driven near-term price understatement, proved irresistible to producers,” they stated.
Dedication to the current price range, subject to inflation
In a statement sent to Rigzone on Wednesday commenting on the latest OPEC+ cut, Robert-Jan van der Mark, multi-asset investment manager at Aegon Asset Management, said: “OPEC is showing its commitment to the range of current prices”.
“In recent years it has demonstrated the ability to make much deeper production cuts if necessary to achieve its goals. He clearly still has ammunition left,” he said.
“Oil price risks have now clearly moved to the upside. Changes in oil prices are a dominant factor in the energy inflation component,” he added.
Van der Mark noted in the statement that this event marks the end of the dampening effect on headline inflation, “as oil prices were falling following an economic slowdown, but have now reversed course.”
“Central banks have been encouraged that their policy of higher rates is nearing an end, by a downward trend in headline inflation that has emerged over the past few months, while core inflation (excluding food and ‘energy) still seems more stable at a high level.” he said
“The rebound in energy prices could signal that headline inflation will also be stickier than expected and may put new pressure on central banks to hike and keep hiking,” he added.
In the statement, Van der Mark highlighted that several contributing market factors leave shale producers unable to respond effectively to OPEC production cuts and noted that the US government cannot replenish strategic supplies to cheaper levels.
“Oil price volatility and higher interest rates have caused the cost of financing for US shale companies to rise,” he said.
“On top of that, oil curves are inverted, where the prices of longer futures contracts are lower than spot prices, which means that US shale oil companies are hedging their production against prices significantly lower than spot oil prices. This gives OPEC producers another competitive advantage,” he added.
“The US government announced in October 2022 that it planned to buy back oil for the SPR when prices are at or below $67-$72 a barrel. Before OPEC came in, oil prices were trading at around these levels, but the price of West Texas Intermediate oil rose above $80 after the announcement, denying the US the opportunity to replenish oil reserves at lower prices,” continued van der Mark .
In the statement, investment manager Aegon Asset Management highlighted that the US government has drawn oil from its Strategic Petroleum Reserve (SPR) over the past 12 months “to balance the market and slow the rise in oil price after Russia invades Ukraine.”
He warned that the SPR is at its lowest level since the early 1980s, which he said “limits the US government’s flexibility to act in an emergency.”
Clearly bullish
In another report sent to Rigzone on Monday, analysts at Macquarie Bank Limited noted that while they believed markets had been internalizing potential support from OPEC, the size and timing of the cut “represents a development clearly bullish for crude.”
“As a first pass, the announced cut would shift our balances to a significant deficit in the second half of ’23, with any offsetting response from shale largely a ’24 event,” the analysts said in the report.
“However, even with much of the OPEC cut through December ’24, our balances would reflect only a modest deficit for FY24 if the US rig count were remain stable at current levels (compared to our base case which has predicted a decrease). ),” they added.
“In other words, while this move provides material near-term support for crude oil, it potentially caps the cyclical downside, and we expect the market to rally strongly to the upside, even if it plays out to a large extent.” to the 24th, we don’t see it requiring a sustained increase in crude oil prices beyond the recent range,” the analysts continued in the report.
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