The oil market wasn’t impressed with the latest OPEC+ meeting which resulted in the alliance extending the current cuts through 2024 and Saudi Arabia announcing a voluntary production cut of 1 million barrels per day (bpd) for July.
Part of the surprise Saudi cut was already baked in in the prices after Saudi Energy Minister Prince Abdulaziz had warned speculators in the days prior to the June 4 meeting to ‘watch out’ and not try to guess what the group or some of its members would do next.
What OPEC+ did was this: it decided to keep the current cuts until the end of 2024, while OPEC’s top producer and the world’s largest crude oil exporter, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July, to around 9 million bpd. The cut could be extended beyond July.
No Price Bump
If the Saudis had hoped for a rally in oil prices following the latest announced cut, they were disappointed. Prices ticked up on the Monday following the meeting on Sunday, but resumed the downward trajectory later last week as the market continued to be more focused on the concerns about slowing economies and recessions than on a looming supply deficit later this year.
The Saudi cut “on paper should be mildly positive but the subsequent price action highlights the current focus on demand worries, and while the cut may support a floor under the market, the upside potential remains limited,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.
The Saudi decision to go at it alone with a cut in July (for now) was seen as “mildly bullish” as it would help to tighten the market.
“However, the market chose to see it differently, basically concluding that OPEC doubts its own projections of a +2 million barrels per day increase in 2023 demand, most of which has been expected to materialize during the second half of the year,” Hansen added.
Oil prices could remain stuck in a trading range until we see evidence that China’s recovery is improving, said Ed Moya, senior market analyst at OANDA.
“The Saudi problem is that energy traders aren’t believing the kingdom has enough power to sway all OPEC+ to deliver meaningful action,” Moya added.
Demand in the second half is expected to support inventory draws and oil prices, the analyst said.
“The US economy is about to show a very robust summer travel season that should mean gasoline and jet fuel demand is going to be very strong. The demand situation from Asia can’t be that bad if the Saudis are also able to raise prices,” Moya noted.
Bjarne Schieldrop, chief analyst commodities at SEB, said, commenting on the unilateral Saudi cut, “USD 80/b is the new USD 60/b and that is probably what Saudi Arabia is aiming for.”
$70 Oil Or $100 Oil?
According to Saxo Bank, from a technical standpoint, the $78-$80 a barrel area in Brent Crude will likely offer a great deal of resistance in the short term and funds positioned for additional weakness are unlikely to change their negative price view until we see a return of $80 per barrel Brent.
The U.S. Energy Information Administration (EIA) doesn’t see a strong rally, either.
The EIA doesn’t expect Brent prices to average more than $80 per barrel in the second half of this year, despite the production cut announced by Saudi Arabia, the EIA said in its latest Short-Term Energy Outlook (STEO) last week. Brent will average $79 per barrel in the second half of 2023, which is $1 a barrel higher than in May’s STEO estimate. The 2024 oil price forecast was raised to an average of $84 per barrel, up by $9 per barrel compared to last month’s assessment.
Citigroup is also bearish as it has been all year, and doesn’t believe the OPEC+ cuts would lead to a major oil price rally.
Citi thinks that the cut is unlikely to result in an oil price run-up to the high $80s or low $90s per barrel.
“The likelihood that Saudi Arabia would tackle this on its own on a sustained basis is quite low,” Citi said in a note.
The bank, whose analysts have been bearish on oil this year, considers that the possibility for lower – instead of higher – prices could be greater, due to possible weaker demand due to recessions in the U.S. and Europe, weaker recovery in China, and higher supply from non-OPEC producers by the end of the year.
A week after the unilateral Saudi cut, Goldman Sachs slashed its Brent price forecast for December to $86 per barrel, from $95 previously expected, citing bearish downside risks from higher supply from sanctioned Russia, Iran, and Venezuela and possibly weaker-than-thought Chinese demand.
Other analysts reaffirmed their calls for higher prices.
ANZ analysts Daniel Hynes and Soni Kumari reiterated their $100 per barrel Brent target for the end of the year, saying that “Investors are likely to add bullish bets, comfortable that Saudi Arabia and OPEC will provide a backstop should the market hit any hurdles.”
ING, for its part, left its price forecasts unchanged for now and still expects ICE Brent to average $96 a barrel over the second half of this year, although economic concerns are now currently ruling the market.
“The macro outlook continues to be a more important driver for prices than fundamentals at the moment,” said Warren Patterson, Head of Commodities Strategy at ING.
By Tsvetana Paraskova for Oilprice.com
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