Oil prices are not going anywhere near $100 per barrel despite the latest production cuts announced by members of the OPEC+ group, as U.S. supply growth and uncertainty in Chinese demand growth path will keep the market fairly balanced, Ed Morse, global head of commodities research at Citigroup, told Bloomberg on Monday.
On Sunday, OPEC+ members, led by Saudi Arabia and other major Middle Eastern producers, announced a fresh combined cut of 1.16 million bpd until the end of this year, on top of Russia announcing that its own 500,000-bpd cut until June would extend to the end of 2023, too.
"There is a scenario for $100 a barrel oil. But I don't think we're anywhere near that yet,” Citi’s Morse told Bloomberg, commenting on the move and its implications on the market.
“To get to a $100 oil we have to have significantly more oil taken out of the market,” he said, for example with disruptions in supply from countries like Iran, Iraq, Libya, and Nigeria altogether at the same time without certainty when that oil can come back to the oil market.
The latest cuts from OPEC+ are an effort to prevent a collapse in oil prices similar to the one seen during the 2008/2009 financial crisis, Morse said.
“I believe strongly that the increase in prices we have already had is going to place U.S. production on a higher path to growth,” he added.
Even with the OPEC+ cuts, the oil market will be fairly balanced, with no big inventory builds, and no big inventory draws, according to Citi’s strategist.
On demand, “we are in a period of time when we see demand’s last hoorah,” Morse noted.
Growth in Chinese oil demand is formidable now, but it basically makes up for the loss seen last year, he added.
After the current period of growth from last year, Citi doesn’t see demand in China “ratcheting up much further,” Morse said.
Citi’s view differs a lot those of other analysts.
Amrita Sen, founder and director of research at Energy Aspects, told CNBC that the surprise OPEC+ cuts are making oil balances look “insanely bullish” for later this year, provided that the global economy holds up.
Hours after OPEC+ announced the new cuts, Goldman Sachs raised its Brent Crude forecast to $95 from $90 at the end of the year. The bank also raised its Brent Crude forecast for 2024, now seeing it at $100 at the end of the year from an earlier projection of $97.
By Tom Kool for Oilprice.com
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Anyone who puts trust in that bank is taking a risk full stop. How many Citi Units have been sold. Many!
Prices will be underpinned in 2030 by a China projected to consume 17.0 million barrels a day (mbd) necessitating crude imports of 12.0-13.0 mbd and continued shrinking of the global oil spare production capacity including OPEC+’s. They will also be aided by the fact that US shale oil is a spent force incapable of raising production meaningfully.
OPEC+’s latest cut was indeed intended to ensure stability of the global oil market against lingering fears of a banking or financial crisis. And while fears have eased considerably, they haven’t disappeared completely, hence OPEC+’s decision.
The cut could also be interpreted as a belated support to Russia over the price cap since their exports can be the next target of a Western price cap. Moreover, OPEC+ members with the exception of Russia need a Brent crude price of $80-$100 a barrel to balance their budgets.
Against the above background, 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