IEA data, OPEC oil supply-demand data indicate that OPEC maintains the status quo
S&P Global’s oil market balances suggest a potential cut by OPEC
The EIA sees the fundamentals allowing for an uptick, but the market is very dubious
OPEC May Seek To Reassert Oil Price Floor As Analysts Torn Between Cut And Rollover
Oil market watchers confused by signals about OPEC+’s next policy move will find little clarity in fundamentals, with the International Energy Agency, OPEC’s analytical arm and the Energy Information Administration in disagreement on supply requirements for the first quarter of 2023.
Receive daily email alerts, subscriber notes, and personalize your experience.
The oil market has already voted with its feet on any potential 500,000 bpd output hike from OPEC+ this week, with Brent futures falling 5% to a 10-month low before recovering from official denials that such an increase was considered.
Only the US Department of Energy’s EIA sees a need for OPEC to pump more oil in the first half of next year, with the Paris-based IEA and the OPEC Secretariat suggesting little chance for a increase. Meanwhile, fundamental forecasts from S&P Global Commodity Insights indicate that OPEC may need to consider further production cuts.
The EIA puts OPEC calls and inventories – an estimate of the production volume required of OPEC countries to balance global crude oil supply and demand – at 29.91 million barrels per day in the first quarter of 2023 compared to 28.46 million barrels per day/d in the fourth quarter of 2022. This would signal room for a significant U-turn by Saudi Arabia and its allies after they began cutting production by 2 million barrels per day this month.
But the IEA and the OPEC Secretariat see little wiggle room, with quarter-over-quarter crude oil calls showing little change.
S&P Global Commodity Insights sees supply outpacing demand by about 2.5 million barrels per day, largely due to expectations of weakening demand resulting from the global economic downturn and COVID lockdowns in China.
Much hinges on two huge unknowns: the degree to which Russian supply will exit the market after sanctions take effect on December 5 and the impact of the related G7 price cap, and when and how quickly Chinese demand will recover .
As Moscow struggles to redirect all of its displaced oil, S&P Global expects Russian production shutdowns due to new export hurdle to peak at 1.5 million bpd in Q1 2023, but then ease as more alternative solutions to the founding sanctions are introduced.
China meanwhile continues to baffle oil bulls who expect a rebound in demand in the commodity-consuming behemoth.
With COVID cases picking up in China and further extended lockdowns likely, Goldman Sachs lowered expectations for Chinese demand by 1.2 million bpd this quarter, noting that this is “equivalent to the actual cut recently implemented by OPEC+, the group’s first successful preventive operation.”
Media reports of a proposed production hike ahead of the December 4 OPEC+ meeting revealed market sensitivity, leading to what some commentators termed a “flash crash” in crude oil futures markets, before denials by top oil ministers see ICE Brent tumble back towards $90 a barrel.
If this was a test of the oil market, OPEC+ got part of the answer.
“The precipitous drop in oil prices that followed the [Wall Street] The Journal’s story probably reinforced the idea that even a partial reversal of the [OPEC+] production cuts would be a bad idea,” said Helima Croft, head of commodity strategy at RBC Capital Markets.
With Russia’s uncertainty on top of oil price volatility (especially in recent days), growing concerns – particularly related to China, and an ongoing US backlash over quota cuts – OPEC+ must make a decision hard. Commodity Insights analysts assume shares will be rolled over at the next meeting, but note that “another cut cannot be ruled out.”
Indeed, while US pressure is seen as the biggest challenge to an OPEC+ cut, conflicting data on oil balances suggest that maintaining the status quo may be the preferred course of action for now.
“If OPEC ministers see that Russian supply is likely to be on the upside and global demand is likely to be on the downside…there could be a case for a preemptive cut,” Standard Chartered Bank said in a statement. Research.
“However, given the current state of the data, we believe the optimal strategy for ministers is to continue with current targets at their next meeting and wait for more robust information on the Russian offer and, if necessary, react accordingly at a subsequent meeting,” he said. added.
But Yousef Al-Shammari, chief executive of consultancy CMarkits, believes there will be a cut, noting that it “could push prices back into the $90-95 a barrel range.” He added that the idea of a floor oil price advanced by many analysts in recent months could be reaffirmed around $90 a barrel if OPEC+ takes action again.