Crude oil prices have so far held on to their gains from Monday despite the latest PMI reading for China, which showed a decline in March, suggesting hiccups along the way to recovery.
Prices soared by more than 6% on Monday following an unexpected declaration by OPEC+ on Sunday that nine of its members will implement voluntary production cuts to the tune of 1.16 million bpd.
Saudi Arabia alone would reduce its output by 500,000 bpd, Riyadh said, and Russia would extend an earlier production cut of the same size until the end of the year.
The additional cuts deepen the global supply reduction from OPEC+ to a total 3.66 million barrels daily, which is equal to 3.7% of the total.
At the time of writing Brent crude had topped $85 per barrel and West Texas Intermediate was trading at close to $81 per barrel, as analysts rushed to update their price forecasts.
Goldman Sachs, for instance, revised upwards its oil price forecast for the year, now expecting Brent to trade at $95 per barrel at the end of the year, up from an earlier forecast of $90 per barrel. It also raised its 2024 oil price forecast.
Energy Aspects’ Amrita Sen went higher, arguing that following the OPEC+ new cut, oil prices could hit $100 before the current quarter ends.
Morgan Stanley, however, bucked the bullish trend, revising its oil price forecast down, to $85 per barrel of Brent crude for this quarter and also cutting its outlook for prices for full-2023 and 2024.
The explanation for that move focused on demand, with the investment bank’s chief commodity strategist, Martijn Rats, saying that OPEC+’s decision “reveals something, it gives a signal of where we are in the oil market. And look, let’s be honest about this, when demand is roaring…then OPEC doesn’t need to cut.”
By Irina Slav for Oilprice.com
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Moreover, China’s domestic oil demand is projected to hit 17.0 million barrels a day (mbd) this year necessitating a crude import of 12.0-13.0 mbd.
Any worries in the market come from lingering fears of the current banking difficulties developing into a global banking or financial crisis. That is why OPEC+ surprised the market by its latest cut to ensure stability of the market.
Moreover, total OPEC+ cuts since last year amount to 2.66 mbd and not 3.66 mbd as the author of this article mentioned. It is because last year’s supposedly cut of 2.0 mbd amounted in effect to only 1.0 mbd because of offsets to some members’ underproduction.
I project that once fears of a banking or financial crisis have been put to rest, Brent crude could be expected to hit $90 a barrel in the first half of 2023 and touch $100 before the end of the year.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert