A week ago, predicting where oil prices would be in six months or at the end of 2023 was relatively easy. Bar a global slowdown, they would be higher.
There were two reasons for that consensus among most analysts watching the oil market. First, China last year ended its zero-Covid policy that was depressing oil demand. Second, the global supply of crude oil was tight and expected to tighten even further as the year wore on.
And then OPEC+ declared an additional production cut, throwing all these forecasts out of the window. If the future of oil prices was at its usual uncertain a week ago, now it got a dose of extra uncertainty.
The market reaction in the days immediately after the OPEC+ announcement resembles its reaction in the days after Russia's invasion of Ukraine last February. An initial surge as worry about the security of supply temporarily takes hold over traders, followed by a plateau and, eventually, a decline.
Of course, everyone rushed to update their oil price forecasts after OPEC+ delivered its message to markets last Sunday. Goldman Sachs revised its Brent crude outlook for the end of the year from $90 per barrel to $95 per barrel. The bank also revised up its end-2024 forecast to $100 per barrel.
Energy Aspects said $100 per barrel of Brent crude is a possibility after OPEC+'s additional production cut. It could happen as soon as this quarter, the firm's chief oil analyst, Amrita Sen, said, or in the second half of the year. If the global economy proved resilient—if oil demand held.
Meanwhile, Energy Intelligence's OPEC correspondence Amena Bakr noted that the OPEC declaration might not be about prices alone. In a recent tweet, Bakr said, "When you have countries with vast hydrocarbon resources with the lowest cost of production in the world, these countries are playing the LONG game and that involves making sure that Opec survives as a marketing management tool."
Indeed, OPEC's clout in market direction appears to be growing once again, after many observers called the death of the cartel several years ago as U.S. shale production broke record after record.
Yet now shale oil output growth is stalling, the long-term outlook is not as bright as it was a few years ago, and OPEC is, as Reuters put it in a recent analysis, back in the driver's seat.
"One thing is for certain, OPEC is in control and driving price and U.S. shale is no longer viewed as the marginal producer," James Mick, senior portfolio advisor at Tortoise Capital Advisors, told Reuters after the OPEC+ announcement.
On the other hand, "Some traders might interpret the OPEC+ cut as a sign of weaker than expected demand for physical markets as OPEC+ possesses some of the best information available in regards to the global physical oil markets," Tortoise portfolio manager Rob Thummel said separately.
Demand has remained the main factor to watch after the initial price surge ended. While some, like Tortoise, are certain oil demand will be resilient, potentially keeping prices higher, others are not so sure, which was reflected in the way prices spiked on Monday and then retreated a bit and stayed there.
If Saudi Aramco's price-setting policies are any indication, demand for oil will remain resilient. Days after the OPEC+ announcement, Aramco raised its official selling prices for Asia—its biggest buyer. It's hard to see this as anything else than a sign of conviction that demand in the region seen as driving global oil demand growth will continue to expand.
If economists warning of a looming global crisis are right, however, that conviction may yet get shaken in the coming months, and prices may decline instead of rising further.
Predicting where oil prices will be at some point in the near future has always been a risky business. This is still the case, despite the dominant bullish sentiment among analysts and industry observers.
By Irina Slav for Oilprice.com
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Prices will be underpinned by a robust global oil demand, the China factor, a tighter market in the aftermath of OPEC+’s latest cut and shrinking global spare oil production capacity including OPEC+’s. These bullish factors overwhelmingly outweigh other bearish factors including concerns about inflation.
Since the pandemic in 2022, OPEC+ has emerged as the most influential player in the market. Its influence has been hugely enhanced by the close cooperation between Saudi Arabia and Russia within OPEC+. These two oil giants plus China account for 26% of global oil production and 39% of global oil trade. Moreover, US shale oil is no longer viewed as a marginal producer. It is a spent force.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert