On April 2nd, major OPEC+producing countries such as Saudi Arabia, Russia, Iraq, and the United Arab Emirates announced significant voluntary production reduction plans, with a total production reduction scale exceeding 1.6 million barrels per day. Most of the production reductions will begin at the end of May and continue until the end of 2023. The next day, the price of Brent crude oil futures in London surged by nearly 6%. According to Goldman Sachs estimates, crude oil futures prices may rebound to $95 per barrel by the end of this year.
Previously, in response to the sanctions imposed by western countries due to the Russia-Ukraine conflict, Russia has announced that since March, its crude oil production has been reduced by 500000 barrels per day. According to market forecasts, the OPEC+production reduction plan may reverse expectations of oversupply in the oil market in 2023, and oil prices will once again enter a period of volatility.
Production reduction exceeds market expectations
The announcement of the production reduction plan surprised many market participants. Although the banking crisis in Europe and America has raised concerns about a global economic recession, Chinese demand is growing strongly. According to S&P’s global forecast, global crude oil demand will grow at a rate of 2.3 million barrels per day in 2023. Before the announcement of production cuts on April 2nd, the actual production of the 19 oil producing countries of OPEC+had decreased by approximately 3.6 million barrels per day compared to before the 2020 outbreak.
Since March, international oil prices have continued to decline. Last month, the price of West Texas Intermediate Crude Oil (WTI) traded on the New York Mercantile Exchange dropped below $65 per barrel, reaching a 15 month low. The reasons for the low oil prices are complex. The banking crises in the United States and Europe are constantly expanding, which has also raised concerns about a global economic recession.
At the end of March, although oil prices slightly rebounded with the easing of the banking crisis, there was still a certain gap between the price of $80 per barrel and OPEC+’s expectations. As an oil producing country that relies heavily on crude oil exports for most of its fiscal revenue, OPEC+members strive to avoid the risk of further oil price declines. According to calculations from the International Monetary Fund (IMF), to achieve fiscal balance in 2023, the ideal crude oil price for Saudi Arabia is $66.8 per barrel, while for the United Arab Emirates, it is $65.8; Among the 8 countries that have announced further production cuts, the average ideal crude oil price for 7 major countries is 84.8 US dollars. In October last year, Nigeria’s Minister of Petroleum and Resources, Timipre Sylva, stated that OPEC+”hopes to maintain oil prices around $90 per barrel
Industry insiders say that the delay in the United States’ policy of collecting and storing strategic oil reserves may also be a trigger to stimulate oil producing countries to reduce production. Last year, the United States Department of Energy released 180 million barrels of oil reserves in response to the soaring oil prices caused by the Russia-Ukraine conflict. Public data shows that its strategic oil reserves are currently at their lowest level in 39 years. The US government previously claimed that if oil prices fall, it will purchase a large amount of crude oil to fill its reserves.
International oil prices are experiencing a surge in stress
After OPEC+announced its production reduction plan, international oil prices skyrocketed accordingly. On April 3rd, WTI crude oil surged 7% at the opening, and the oil price briefly exceeded $80 per barrel, reaching $79.976 per barrel as of the time of publication. Asian crude oil futures have risen by more than 5%, while the main crude oil futures contracts at the Shanghai Energy Trading Center in China have closed up 8.23%, fuel oil has risen 5.84%, and asphalt has risen 4.33%.
The reactions of various countries to this production reduction have been mixed. According to Reuters, on April 2nd, a spokesperson for the US National Security Council said, “Given market uncertainty, we believe it would be unwise to reduce production now.” The latest research report from CITIC Futures shows that the US inflation index is highly positively correlated with crude oil prices. If international crude oil production is reduced, the United States may face a new round of inflation caused by rising crude oil prices. St. Louis Fed President Brad pointed out after the announcement of the production reduction plan that rising oil prices may make the Fed’s task of reducing inflation more challenging.
Russian Deputy Prime Minister Novak stated that Russia’s plan to reduce production by 500000 barrels per day will continue until the end of 2023, in line with countries such as Saudi Arabia. It is reported that as of the end of 2021, 40% of Russia’s national treasury revenue comes from energy sources such as crude oil, and the rise in crude oil prices will directly bring income growth to Russia.
In Asia, the production reduction plan has also sparked a thousand waves. Saudi Arabia stated that the announced production reduction plan is a “preventive measure aimed at supporting the stability of the oil market”. Market insiders have analyzed that this move may be related to the global economic recession, and the relevant countries of the OPEC+organization clearly consider their own economic interests.
Lim Jit Yang, Asia Pacific oil market consultant at S&P Global Commodity Insight, said, “The latest production reduction commitment has led to a total reduction of 3.66 million barrels per day for OPEC+. Asian refiners will face harsher raw material competition, especially as crude oil demand increases after spring maintenance ends
International oil market supply and demand or reversal
Market analysts say that before OPEC+’s unexpected production reduction, the crude oil market was in a state of oversupply. The US Energy Information Administration had expected in its March energy outlook that the crude oil market would be in a slight oversupply state for the entire year of 2023, with an excess of less than 1 million barrels per day. OPEC+’s current production reduction has turned this expectation into a slight shortage. In the second half of this year, the supply of crude oil will be very tight.