OPEC+ Has Lots of Dry Powder for Further Cuts

OPEC+ has lots of dry powder for further cuts if needed.

That’s what Bjarne Schieldrop, a Chief Commodity Analyst at Skandinaviska Enskilda Banken AB (SEB), said in a statement sent to Rigzone, adding that the group has “made it clear” that $70 per barrel is the oil price floor.

“OPEC+ has only just begun cutting, with a 1.5 million barrel per day reduction starting in May,” Schieldrop said in the statement.

“But this is only bringing Saudi Arabia’s oil production back to roughly its normal level of around 10 million barrels per day following unusually high production of 11 million barrels per day in September 2022,” he added.

The SEB analyst noted in the statement that OPEC+ will now spend the month of May assessing the effects of the latest cuts and said the Joint Ministerial Monitoring Committee (JMMC) will then meet on June 4 and make a recommendation to the group.

“If it becomes clear at that time that further cuts are needed, then we will likely get verbal intervention during June in the run-up to the OPEC+ meeting [on] 5-6 July, and then fresh cuts, if needed,” Schieldrop said in the statement.

The 48th JMMC meeting, which took place via videoconference on April 3, noted a voluntary production adjustment announced on April 2 by Saudi Arabia, Iraq, United Arab Emirates, Kuwait Kazakhstan, Algeria, Oman, and Gabon starting in May until the end of 2023, a statement posted on OPEC’s website following the 48th meeting highlighted.

The OPEC site revealed last month that the 49th Meeting of the JMMC is scheduled to take place on June 4. A statement posted on OPEC’s site following the previous OPEC and non-OPEC Ministerial Meeting, which took place on December 4, revealed that the next OPEC-non-OPEC Ministerial Meeting would take place on June 4. At the time of writing, neither the 49th JMMC meeting nor the next OPEC+ meeting appear on the upcoming events section of the OPEC site. The only event that appears is the 8th OPEC International Seminar, which is currently scheduled to take place on July 5-6.

Production Cuts Prove Effective

Production cuts by OPEC+ have proved effective time and time again, Schieldrop said in the statement.

“Deep cuts announced by OPEC in December 2008 made the oil price bottom out at $33.8 per barrel on Christmas Eve. A massive 9.7 million barrel per day cut in production in May 2020 onward made the oil price soar after the trough in April 2020,” the analyst added.

“The regular historical pattern is first a price-trough, then cuts, then rebound. This creates an anticipation by the market of a similar pattern this time - that the oil price first is going to head to $40 per barrel, then deep cuts by OPEC+ and then the rebound,” he continued.

In the statement, Schieldrop noted that OPEC+ is faster and much more vigilant today.

“Faster markets and faster OPEC+ action means we could still have a deep trough in prices but it won’t last very long,” he said.

“Oil inventories previously had time to build up significantly when OPEC acted slowly. When OPEC then made cuts it would take some time to reverse the inventory build-up, keeping prices lower for longer,” he said.

“Rapid action by OPEC+ today means that inventories won’t have time to build up to the same degree if everything goes wrong with the economy, leading to briefer selloffs and sharper and faster rebounds,” Schieldrop added.

Oil Price

The price of Brent crude closed at $72.97 per barrel on March 17, before rising to a close of $87.33 per barrel on April 12, and dropping to a close of $72.33 per barrel on May 3. Brent has since risen to a close of above $77 per barrel.

On May 9, 2022, the price of Brent closed at $105.94 per barrel.

To contact the author, email andreas.exarheas@rigzone.com