Oil: what’s behind a surprise OPEC+ production cut?
Summary: as is generally the case with surprises, markets have
almost certainly overreacted to the latest OPEC+ cuts in oil output, the
timing of which probably owes more to Saudi/US tensions than it does to
global economic prospects. They will almost certainly be more than
reversed in 2H2023.
We thank our regular contributor Alastair Newton for today's
newsletter. Alastair worked as a professional political analyst in the
City of London from 2005 to 2015. Before that he spent 20 years as a
career diplomat with the British Diplomatic Service. In 2015 he
co-founded and is a director of Alavan Business Advisory Ltd.
The final sentence of my first look at oil this year, published on 17
January, reads as follows: "So there may yet need to be a meeting
before June. But, the bulls notwithstanding, now is almost certainly not
the time for it."
Then, the market was in a decidedly bullish mood, suggesting that an
increase in output was more likely than a cut. However, I had earlier
noted that “as things stand OPEC+ currently has room for manoeuvre in
either direction,” arguing that we might well see a move one way or the
other before the next scheduled meeting in June. Nevertheless, the
timing of OPEC+’s 3 April “voluntary” cuts in output — compounded by them being agreed without there being a formal meeting — was a genuine surprise.
This is worthy of note since, coupled with some hyperbolic headlines,
they appear to have spurred a sizeable overshoot by investors (who
habitually overreact to surprises). The initial surge in the price of
Brent (more or less matched by the US benchmark WTI) was 8.4 percent,
taking the international benchmark to US$86.44pb from a closing price on
Friday of US$79.77. These gains were almost immediately parred back;
but as Asian markets closed for the day both Brent (at US$84.17pb) and
WTI (at US$79.78pb) were still up 5.4 percent.
It is also important to underline that the actual size of the agreed cut was 1,157,000bpd, not two million as CNN claimed. Even taking into account the extension of Russia’s previously implemented cut
of 500,000bpd, CNN is way off the mark. Note too that, based on the
somewhat more modest outturn relative to the cuts agreed in October, RBC
Capital Market’s oil expert Helima Croft (quoted in The New York Times)
reckons that, in practice, this latest round, which is due to come into
effect on 1 May, will probably see OPEC+ output fall by no more than
600,000bpd.
On this basis alone it is reasonable to expect some further softening
of the price in the coming days. Thus, although I continue to see the
oil price as something of a tug-of-war between OPEC+ and central banks, I
am not convinced that, in the short-term at least, these cuts are going
to fuel inflation to the point of encouraging more interest rate rises
than would otherwise be the case.
All this being said, it is worth taking a closer look at the timing.
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