In an oil market update sent to Rigzone late Tuesday, Rystad Energy Senior Vice President Jorge Leon outlined that OPEC+’s extended production cuts of 1.7 million barrels per day into the second quarter have resulted in an increase of $5 per barrel to Rystad Energy’s previous price projection.“As a result, Brent is now forecasted to average $85 for 2024,” Leon said in the update.
“Voluntary cuts will continue into Q2, preventing stock accumulation and keeping the market in deficit. This will add price pressure,” he added.“Strong demand growth in H2 is expected due to Asia and the resilient U.S. economy, even amid high interest rates. The market will remain in deficit in H2 even if OPEC+ fully unwinds the cuts at the end of Q2,” he continued.
By extending the voluntary cuts, OPEC+ crude production is anticipated to average 34.6 million barrels per day in Q2 before increasing to around 36.3 million barrels per day in H2, assuming the cuts will not be extended into the third quarter, Leon stated in the update, which highlighted that the group’s share of the market will drop to its lowest ever level.
“It is interesting to note that OPEC+’s recent strategy is focused on supporting prices rather than expanding market share,” Leon said in the update.“This approach indirectly benefits the U.S. shale sector, which has reached an unprecedented production level of over 13.3 million barrels per day of crude and condensate,” he added.
“Despite this trend, OPEC+ does not appear to be overly concerned, at least not yet. Rystad Energy’s analysis suggests that by June this year, OPEC+’s crude (excluding Iran, Venezuela, Mexico, and Libya) share of global liquids supply is projected to drop to its lowest point since the formation of the OPEC+ alliance in 2016,” he continued.
Leon highlighted in the update that, in the middle of the “oil price war” in April 2020, OPEC+ crude accounted for 41.4 percent of global supply. He pointed out that, after the “massive 10 million barrel per day cut”, OPEC+’s share dropped to 35 percent in May 2020.“Since then, OPEC+ crude has gradually regained market share in 2021 and 2022 as official cuts were gradually unwound,” Leon said in the update.
“Following the implementation of the two million barrel per day production cuts in October 2022, the 1.16 million barrel per day voluntary cut in April 2023, the one million barrel per day voluntary cut from Saudi Arabia since July 2023, and the latest 1.7 million barrel per day voluntary cut announced in November 2023, OPEC+ crude share was 34.3 percent in January this year,” he added.“The just-announced extension of the voluntary cuts will bring that share down to 33.9 percent by June – the lowest share ever for the group,” he continued.
Did OPEC+ Need to Extend Cuts?
Leon noted in the update that one of the major questions in the oil market is whether OPEC+ needed to extend the voluntary cuts to prevent a market surplus.“To answer this question, we can analyze the market balance in the second quarter of this year using the forecasts from three main agencies – the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA), and OPEC – as well as Rystad Energy, before Sunday’s announcement,” he said in the update.
According to Rystad Energy, OPEC+ needed to extend oil production cuts to prevent stock accumulation, Leon stated in the update, adding that, in the second quarter of this year, before Sunday’s announcement, “there was a surplus of 560,000 barrels per day of liquids if OPEC+ rapidly unwound the cuts”.
“The latest EIA Short-term Energy Outlook (STEO) – which assumes that OPEC+ crude production would partially unwind the voluntary cuts – shows a marginal surplus of 140,000 barrels per day,” Leon said in the update.“Although OPEC and the IEA’s monthly oil market reports don’t provide a forecast of OPEC crude production, we can infer the market balance by assuming Rystad Energy’s OPEC+ crude production forecast,” he added.
“In this case, the IEA’s inferred balance for the second quarter of this year shows a large surplus of 1.54 million barrels per day due to strong supply growth and limited demand growth next quarter. However, OPEC’s inferred balance for the second quarter shows an almost perfectly balanced market,” he continued.Leon noted in the update that OPEC+ countries have a choice to make.
“If they prefer the IEA’s estimates, extending the cuts into the second quarter will bring the market to equilibrium next quarter,” he said.“On the other hand, if they favor the EIA’s or Rystad Energy’s balances, the extension of voluntary cuts would move the balance from a surplus to a deficit,” he added.“However, if they rely more on OPEC’s market views, there is likely no need to extend the voluntary cuts since the market would have been balanced anyway,” he continued.“Therefore, if OPEC relies on its own market views, we must conclude that the group is highly determined to pursue a price-supportive strategy,” Leon went on to state.
Brent Inches Up
In a report sent to Rigzone on Monday, Bjarne Schieldrop, the Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), noted that Brent was “inching up” 0.2 percent to $83.7 per barrel that morning, “with support from news that OPEC+ will keep production curbs in place to end of June this year”.
“Brent crude sold off to $74.79 per barrel in early January and then another sell-off in early February to $76.62 per barrel (both intraday lows). Since mid-February, however, Brent crude has moved gradually higher, inch by inch or cent by cent more correctly,” he added.Schieldrop stated in the report that a range of factors has supported Brent crude’s gradual move higher.
“This gradual move higher has been underpinned by residing fear for a U.S. hard landing (and a global recession), a steady course by OPEC+ sticking to ‘price over volume’ strategy, stronger confidence that U.S. shale oil production will go sideways most of the year with a U.S. total hydrocarbon liquids growth from Q4-23 to Q4-24 of only 0.1 million barrels per day year on year, and … total U.S. crude and products inventories, including SPR, ticking lower rather than higher,” he added.
“The latter element here indicates a total, global supply/demand balance in slight deficit which again reflects that cuts by OPEC+ have been sufficient so far,” Schieldrop continued.In the report, Schieldrop highlighted three main elements of uncertainties for 2024.“1/ U.S. shale oil growing more or less than current sideways expectations; 2/ global oil demand growing more or less than current expectations; 3/ tighter or looser enforcement of U.S. sanctions towards Russia – but Biden won’t enforce the oil price into a spike ahead of the election”.
The SEB commodities chief noted that the first element is both a bull and a bear risk.“It could go both ways. There is also a risk that U.S. shale oil declines in 2024,” he said in the report.The second element could also go both ways, according to Schieldrop, who added, however, that SEB “tilt[s] to the bear risk side on this as politics around the world increasingly is protectionist and thus growth-negative”.
Schieldrop also noted in the report that element three goes hand in hand with element one.“If U.S. shale oil supply grows more than expected then [the] U.S. administration will likely enforce sanctions towards Russia harder. But also the other way around if U.S. shale oil production disappoint[s] and declines,” he said.“So 1/ and 3/ should partially be balancing forces rather than risk of double up in either direction,” he added.
“That leaves us with main risk in 2024 being 2/, demand. But to really sink the oil price to a crash the demand weakness must be so bad that OPEC+ actually switches strategy to ‘volume over price’ and allows the oil price to crash,” he continued.“This seems unlikely unless we get a sharp, global economic slowdown/recession,” he went on to state.Schieldrop outlined in the report that SEB’s market outlook is “boring” and “sideways at $85 per barrel for 2024”.“But markets are normally never boring for very long. So some surprises will come along the way for sure anyhow,” he added.
OPEC Statement
A statement posted on OPEC’s website on Sunday said the OPEC Secretariat “noted the announcements of several OPEC+ countries extending additional voluntary cuts of 2.2 million barrels per day, aimed at supporting the stability and balance of oil markets”.The statement noted that these voluntary cuts are calculated from the 2024 required production level as per the 35th OPEC Ministerial Meeting held on June 4, 2023, and added that they are in addition to the voluntary cuts previously announced in April 2023 and later extended until the end of 2024.
“These additional voluntary cuts are announced by the following OPEC+ countries: Saudi Arabia (one million barrels per day); Iraq (220,000 barrels per day); United Arab Emirates (163,000 barrels per day); Kuwait (135,000 barrels per day); Kazakhstan (82,000 barrels per day); Algeria (51,000 barrels per day); and Oman (42,000 barrels per day) for the second quarter of 2024,” the statement said.“Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions,” it added.
“The above will be in addition to the announced voluntary cut by the Russian Federation of 471,000 barrels per day for the same period (second quarter of 2024), which will be from crude oil production and exports as follows – in April 350,000 barrels per day from production and 121,000 barrels per day from exports; in May 400,000 barrels per day from production and 71,000 barrels per day from exports; in June 471,000 barrels per day totally from production,” it continued.
Russia’s voluntary production cut is in addition to the voluntary cut of 500,000 barrels per day previously announced in April 2023, which extends until the end of December 2024, the statement said. The export cut will be made from the average export levels of the months of May and June of 2023, it added.According to OPEC’s website, the next meeting of the joint ministerial monitoring committee is scheduled for April 3, while the next OPEC and non-OPEC ministerial meeting is scheduled for June 1.
Source:https://www.rigzone.com