Oil Surges In Early Trading After OPEC+ Surprise 'Unipolar World'-Challenging Production Cut
Update (1800ET): As one would have expected, oil prices are surging at the futures open with WTI up over 7% near $82 - its highest since late Jan...
Brent hit $86...
Additionally, less than two weeks after slashing its 2024 Brent price target from $100 to $94, Goldman done a full 180, and late on Friday raised its 2024 Brent forecast back to $100, and 2023 oil price target to $95 (from $90, and from $95 previously).
Nine members of OPEC+ announced today a surprise "voluntary" collective output cut totaling 1,66mn b/d which will take effect from May till the end of 2023.
As we have argued, OPEC+ has very significant pricing power relative to the past, and today's surprise cut is consistent with their new doctrine to act preemptively because they can without significant losses in market share.
As we already assumed that Russia cuts would extend into 2023H2, we are lowering our OPEC+ production end-2023 forecast by 1.1 mb/d. Incorporating this significantly lower OPEC+ supply, slightly lower demand, and the modest French SPR release, we have nudged up our Brent forecasts by $5/bbl to $95/bbl (vs. 90 previously) for December 2023, and to $100 (vs. 97) for December 2024.
(Full note available to pro subs.)
Finally, earlier today we noted that heading into this OPEC+ cut weekend, WTI shorts had trimmed their total exposure by the most in 7 years. However, as the next chart shows, there are still a lot of shorts left to cover...
... while the longs are about to exit dormancy.
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Update (1500ET): The FT reports that, according to people familiar with Saudi Arabia’s thinking, Riyadh was irritated last week that the Biden administration publicly ruled out new crude purchases to replenish the strategic stockpile that had been drained last year as the White House battled to tame inflation.
As an aside, we joked just a few days ago that contrary to its earlier reps and warranties that the US would start refilling the SPR if oil dropped below $72, that this won't be happening any time soon if ever...
US Unlikely to Refill Oil Reserve in Second Quarter: Analyst— zerohedge (@zerohedge) March 17, 2023
Or ever... until it's needed
...and according to the FT, that was the straw that broke the OPEC's back.
Energy secretary Jennifer Granholm’s statement that it could take “years” to refill the reserve sent oil prices briefly lower. The White House had previously offered reassurance to Saudi Arabia that it would step in to make purchases for its strategic reserve if prices fell.
Of course, there is always 'the smartest guy we know' for Biden to rely on energy policy...
Is the DOE still subletting energy guru Hunter Biden from Burisma? https://t.co/Uhh6A4BIko— zerohedge (@zerohedge) April 2, 2023
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Update (1330ET): Well we didn't think it would take long.
A spokesperson for the National Security Council at the White House has responded to OPEC+'s decision to cut crude production by 1 million barrels/day by saying that "output cuts aren't advisable right now given market uncertainty," adding that The White House "will continue to work with all producers and consumers to ensure energy markets support economic growth and lower prices for American consumers."
Helima Croft, head of commodity strategy at RBC Capital Markets, said Saudi Arabia was staking out an economic strategy independent of the US, after a deterioration in relations between Riyadh and Washington during the Biden administration.
“It’s a Saudi-first policy. They’re making new friends, as we saw with China,” Croft said, referring to a recent Beijing-brokered diplomatic deal between Saudi Arabia and Iran.
The Kingdom was sending a message to the US that “it’s no longer a unipolar world”.
Who could have foreseen Saudis turning their back (even more) on Biden? Oh yeah:— zerohedge (@zerohedge) April 2, 2023
Saudis Joins Shanghai Military And Security Block As It Embraces China - April 1
In "Huge" Chinese Push By Aramco, World's Biggest Oil Producer To Build $10BN Petrochemical Complex - March 27
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We asked this question last month: Who cuts first: OPEC+ or Fed?
Who cuts first: OPEC+ or Fed— zerohedge (@zerohedge) March 15, 2023
... and more than two weeks later, we finally have an answer:
We have a winner: *SAUDI ARABIA TO CUT OIL OUTPUT BY 500,000 BARRELS/DAY FROM MAY https://t.co/ig84m7bTnC— zerohedge (@zerohedge) April 2, 2023
In the latest in a long series of slaps on Biden's face, on Sunday OPEC+ unexpectedly announced an oil production reduction of over 1 million barrels per day, limiting output from May. Saudi Arabia spearheaded the cartel's efforts by committing to a 500,000-barrel reduction of its own production.
According to the Saudi Press Agency, a Ministry of Energy official stated the Kingdom of Saudi Arabia will "implement a voluntary cut of 500 thousand barrels per day from May till the end of 2023."
The cut will be in coordination with other OPEC and non-OPEC participating countries in the declaration of cooperation, the state-run media outlet continued.
"This voluntary cut is in addition to the reduction in production agreed at the 33rd OPEC and non-OPEC Ministerial Meeting on October 5, 2022," the paper pointed out.
Other members, such as Kuwait, the United Arab Emirates, and Algeria, also joined in the reduction efforts.
Previously, Russia had pledged to cut its crude-only output by 500,000 barrels per day in March in response to Western sanctions, including price caps on its oil and petroleum production, and to keep those curbs in place through June, but has now extended its pledged cuts through the end of the year
Here are the reductions per country:
*SAUDI ARABIA TO CUT OIL OUTPUT BY 500,000 BARRELS/DAY FROM MAY
*KUWAIT TO VOLUNTARY CUT OIL PRODUCTION BY 128,000 BARRELS/DAY
*UAE TO REDUCE OIL PRODUCTION BY 144,000 BARRELS/DAY FROM MAY
*KAZAKHSTAN TO CONTRIBUTE 78K B/D TO OPEC+ OUTPUT CUT: MINISTRY
*IRAQ TO CUT 211,000 B/D OF OIL OUTPUT FROM MAY: MINISTRY
*ALGERIA TO CUT 48K B/D OF OIL OUTPUT FROM MAY TO END 2023: APS
*OMAN TO CONTRIBUTE 40K B/D TO OPEC+ PRODUCTION CUT: DELEGATE
Russia commented on the announcement of production cuts:
"Today the global oil market is going through a period of high volatility and unpredictability due to the ongoing banking crisis in the US and Europe, global economic uncertainty, and unpredictable and short-sighted energy policy decisions.
"Ministry of Energy official emphasized that this is a precautionary measure aimed at supporting the stability of the oil market," SPA reports
Brent futures are expected to rise this evening in response to today's news. Prices have been range bound between $86-$73 a barrel for much of 2023.
“Opec+ have made a pre-emptive cut to get ahead of any possible demand weakness from the banking crisis that has emerged,” said Amrita Sen, director of research at Energy Aspects.
And cue the "disappointment" press release from The White House.