OPEC+’s Surprise Off-Cycle Cut Propels Oil Above $80/Bbl, Accelerating Market Shift Toward Deficit
Oil posted a third consecutive weekly gain. The May ’23 WTI contract gained $5.03 or 6.65% on the week to finish at $80.63/Bbl, driven by OPEC+’s surprise production cut.
OPEC+ surprised the market with a voluntary cut of 1.66 MMBbl/d from May to the end of 2023, aiming to stabilize the oil market. Saudi Arabia and Russia will take the lead with reductions of 0.5 MMBbl/d each, followed by other member nations. The latest announcement brings the total volume of cuts by OPEC+ to 3.66 MMBbl/d, equal to about 3.7% of global demand. The decision caught short sellers off guard and impacted consumers and the global economy, causing concerns about inflation and prompting bets on further interest rate hikes.
Our expectation for a slight market deficit in 2H2023 relies on factors like robust demand from China, a reduction in Russian supply, and pricing in economic concerns. The OPEC+ preemptive cut strengthens this view, but demand-side growth risks remain. It suggests a potentially bleaker outlook than previously forecast.
On balance, AEGIS believes that price risk is skewed to the upside in 2023 due to supply shortfalls and upside demand risks. AEGIS acknowledges that global economic concerns are real and advises a modestly bullish scenario where there is only moderate undersupply but low inventories of oil and products. Furthermore, low OPEC spare capacity could lead to slight scarcity and more leverage on price than usual. This vulnerability makes the market susceptible to upsets in the daily flow of oil supply.
AEGIS hedging recommendations for crude oil remain costless collars for 2023 and 2024. A collar would set a price floor but allow for more upside participation, compared to a swap if prices realize higher. The upside exposure afforded by the structure makes it very popular among our clients in bullish markets.