Bond traders have learned the hard way not to fight the Fed; now OPEC+ is trying to train oil traders not to fight their decisions.
That’s what BofA Global Research analysts said in a new report sent to Rigzone, which highlighted that Brent crude prices had fallen from a high of $139 a barrel in the first half of 2022 to a low of 70 dollars per barrel in the first half. of 2023, “prompting oil ‘central bank’ OPEC+ to pull 1.66 million barrels from the market in a surprise move.”
In the report, analysts said that with this “new approach”, OPEC+ hopes to offset oil demand risks from the banking crisis and discourage macro-speculation against oil markets.
“In other words, the group is determined to preserve the value of crude oil even in a recession, especially in a context of high inflation, and does not want to wait for oil prices to fall below $50 per barrel to make a decision to cut supply. as it might have done in the past,” analysts at BofA Global Research noted in the report.
Looking at whether or not the OPEC+ strategy will work, analysts at BofA Global Research stated in the report that “we think it will.”
“For starters, macro indicators do not suggest an imminent slowdown and demand for price-sensitive services (fuel and gasoline) should be supported by China’s reopening and strong Western labor markets, while industrial-linked demand (naphtha, diesel, fuel). oil), which is already weak, looks less likely to be affected by higher oil prices,” analysts said.
“So OPEC+ already has a strong tailwind to work with. Importantly, in a world of tight physical supply and ample consumer demand, the price elasticity of U.S. shale production has fallen sharply, placing OPEC+ back at the center of oil price formation,” the analysts added.
“While the US may not be filling the Strategic Petroleum Reserve (SPR), OPEC+ will now move to reduce commercial oil stocks. Meanwhile, geopolitics is aligning incentives for members of the OPEC+ work together. But it may now be more difficult to apply an EU/US cap on Russian oil, as Japan’s energy policies are already demonstrating,” the analysts continued.
Price implications
BofA Global Research analysts noted in the report that, in their view, there are “three key price implications of the OPEC+ cuts.”
“First, Brent prices will likely average $10 to $15 a barrel above previous forwards of $81 a barrel over the next 12 months,” the analysts said in the report.
“Secondly, the term oil structure is likely to remain on a sticky backlog. Thirdly, crude oil spreads are likely to narrow, hurting global refining margins and transferring value to producers,” the analysts added.
“Previously, we expected a small oil market surplus of 200,000 bpd in 2023, but we now see a shortfall of 400,000 bpd following the cuts and the banking crisis,” the analysts continued.
With inventories poised to decline, Brent volatility should ease, helping to anchor oil price expectations, analysts said in the BofA Global Research report.
“However, physical OPEC+ crude cuts will collide with central bank monetary hikes designed to curb demand, leading to macro risks. Net, we remain constructive and still see $88/bbl Brent from average by 2023,” the analysts said in the report.
According to one extraordinary market update by Rystad Energy Senior Vice President Jorge Leonsent to Rigzone earlier this month, if delivered in full, the recently announced OPEC+ cuts will further tighten an already fundamentally tight oil market, driving Brent to $100 a barrel sooner than expected ‘waited and they would increase the price to around $110 per barrel this summer. .
“Rystad Energy believes these voluntary cuts will further tighten the oil market for the rest of the year and could push prices above $100 a barrel and keep them above that level for most of the rest of the year,” Leon said in the update.
strong signal
In a statement commenting on the OPEC+ cut sent to Rigzone last week, RANE senior global analyst Matthew Bey said: “It is believed that Saudi Arabia and its allies wanted to target speculators who had bet on a drop in the price of oil following the collapse of SVB and the takeover of Credit Suisse”.
“It sends a strong signal from OPEC+ to the market that the bloc will act if oil prices fall below $75 or $80 per barrel for an extended period of time,” Bey added in the statement.
“Saudi Arabia and OPEC+ are betting that any price increase will not translate into increased investment in shale oil and the U.S. Cost inflation and supply shortages are likely to crew continue to limit the sensitivity of US shale oil production to rising prices,” he noted.
In the statement, Bey noted that the decision by Saudi Arabia and several other OPEC+ countries to cut oil production led to an increase in oil prices last week “as the move was unexpected and the markets had not charged this kind of reduction.”
A report sent to Rigzone by Standard Chartered earlier this month revealed that the firm’s analysts thought the deciding factor behind the cut was “positioning data” and “the rapid move to a bearish speculative extreme amid the market turmoil that followed the collapse of SVB”. The report noted that there were 228.9 million barrels of speculative net selling of crude oil in just two weeks and highlighted that this was a faster selling rate than at the start of the pandemic lockdowns.
To contact the author, please send an email andreas.exarcheas@rigzone.com
