Oil prices have sunk to levels that are leaving traders wondering two things: will OPEC implement further cuts to raise prices, and will the United States finally move to purchase some crude to refill its drained SPR.
Traders who have been brutalized by falling prices over the last couple of weeks were likely disappointed this week when they heard Jennifer Granholm’s answer the second of those questions. It will be difficult to refill at WTI $70, Granholm said, adding that it would take years to replenish the SPR.
Some traders are still wondering whether OPEC+ will see the banking collapse—which led to falling oil prices—as a motive for cutting production beyond the 2 million bpd that the group is cutting now.
First, we should point out that Russia has already agreed to cut 500,000 bpd. This is a voluntary cut not arranged by the OPEC+ group, and was spurred on, Russia says, by Western sanctions. Some traders are looking for cuts beyond that, but we think it’s unlikely at this point that OPEC+ will cut production this year unless the market fundamentals change.
It is routinely said that OPEC members have specific breakeven prices in mind, and they will defend those prices. The $80 price floor has been bandied about in the past. But also in the past, production changes from OPEC/OPEC+ have had another factor behind them: the reason behind the price moves. While most OPEC members rely heavily on oil revenues to support their fiscal budgets, they also…
Oil prices have sunk to levels that are leaving traders wondering two things: will OPEC implement further cuts to raise prices, and will the United States finally move to purchase some crude to refill its drained SPR.
Traders who have been brutalized by falling prices over the last couple of weeks were likely disappointed this week when they heard Jennifer Granholm’s answer the second of those questions. It will be difficult to refill at WTI $70, Granholm said, adding that it would take years to replenish the SPR.
Some traders are still wondering whether OPEC+ will see the banking collapse—which led to falling oil prices—as a motive for cutting production beyond the 2 million bpd that the group is cutting now.
First, we should point out that Russia has already agreed to cut 500,000 bpd. This is a voluntary cut not arranged by the OPEC+ group, and was spurred on, Russia says, by Western sanctions. Some traders are looking for cuts beyond that, but we think it’s unlikely at this point that OPEC+ will cut production this year unless the market fundamentals change.
It is routinely said that OPEC members have specific breakeven prices in mind, and they will defend those prices. The $80 price floor has been bandied about in the past. But also in the past, production changes from OPEC/OPEC+ have had another factor behind them: the reason behind the price moves. While most OPEC members rely heavily on oil revenues to support their fiscal budgets, they also look at the why. The recent price slide is not about oil fundamentals—it is about sentiment and fear in the market caused by the banking collapse, about something that could happen in the future. This makes it far less likely that OPEC will respond with cuts.
In further defense of what we suspect will be OPEC’s do-nothing approach, the unknown of China’s oil demand is still lingering over the market. Rather than eager oil traders ready to lap up every piece of China data to suggest that the thirsty Asian nation’s recovery is already underway, OPEC is viewing China’s demand recovery as something that has yet to take place. China’s demand has not yet rebounded, but signs are there that it might be coming soon. OPEC would be unlikely to cut production further than it already has with the prospect of more demand right around the corner, despite the temporary blip caused by market panic as a result of the SVB collapse.
Yes, the bank collapses could spread. Yes, it could lead to further recession and stymie future economic growth (and oil demand growth). But the fundamentals of China’s demand uptick and oil demand loss as a result of the banking collapse are nonexistent for now. We expect OPEC to stay the course, as it has said it would do for the rest of the year, and leave its 2 million bpd cuts unchanged.
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