What Will OPEC Do in 2023?
Analysts at Goldman Sachs have offered their views on what the Organization of the Petroleum Exporting Countries (OPEC) may do this year, in a new report sent to Rigzone.
The analysts, which highlighted in the report that they expect “solid” global oil demand growth of 2.7 million barrels per day in 2023 to push the market back into deficit in the second half (H2) of the year, said in the study that this tightening should allow OPEC to unwind its October production cut in H2.
“However, if the market turned out to be softer, then OPEC could stick to its October cuts or cut production even further given its significant pricing power,” the analysts stated in the report.
At the 33rd OPEC+ meeting in October, the group decided to cut overall production by two million barrels per day from August 2022 required production levels, starting in November 2022. According to a production table posted on the OPEC website, which showed voluntary output adjustment figures from November 2022 to December 2023, Saudi Arabia and Russia have the highest voluntary adjustment figures at 526,000 barrels per day each.
In its latest meeting, which was held in December, OPEC+ decided to hold production steady following the October cuts. The group is currently next scheduled to meet in June this year.
Successfully Proactive
In its latest report, Goldman Sachs noted that, in 2022, OPEC became successfully proactive for the first time in decades.
“The October OPEC cut was not only the first successful preemptive cut ahead of demand weakness, but it also occurred at an unusually high oil price level,” Goldman Sachs analysts stated in the report, which analyzed OPEC’s pricing power, or “its ability to raise prices without hurting its demand too much”, using two approaches.
According to the first approach, which was said to analyze high-frequency oil price moves around all OPEC production announcements of the last four decades, “larger effects of OPEC supply news on oil prices in recent years” was found, “suggesting that OPEC pricing power is now much greater than usual”.
“Our second approach looks at a micro economic model of OPEC as a dominant producer, and concludes that the fundamentals imply that OPEC pricing power is now larger than usual,” the Goldman Sachs report stated.
“First, the formation of OPEC+ has boosted the producer group’s effective market share. Second, the low price elasticity of non-OPEC oil supply, including for U.S. shale (related to financial discipline and bottlenecks), and limited spare capacity are restraining competitors’ ability to offset OPEC production cuts. Third, global oil demand is now inelastic given the lack of substitutes in an energy constrained world,” the report added.
To contact the author, email andreas.exarheas@rigzone.com
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