Brent oil: Why oil is not soaring despite the production cuts decided by OPEC+

(BFM Bourse) – Since November 2022, OPEC and its allies have drastically reduced their production to support oil prices. But this decision had only a limited impact on the black gold market as several factors tend to numb prices.

OPEC+, which includes the Organization of the Petroleum Exporting Countries and its allies including Russia, and which produces about 40% of the world’s crude, has cut oil production since November in the face of falling prices.

Saudi Arabia and Russia, the world’s top oil exporters, decided on Monday to further cut production to support prices, a move that had only a temporary impact on prices.

These two announcements bring to more than five million barrels per day (bpd) the production cuts agreed by members of OPEC+, or about 5% of world oil production.

In April, the organization had announced an agreement to limit supply until 2024, a surprise announcement that had helped raise prices by about $9 to more than $87 per barrel. barrel of Brent in the following days.

A decision with little impact on prices

These gains were not sustainable, with Brent trading at just below $78 per barrel. barrel Friday. Eurasia Group analysts say further cuts “will do little to change pessimism in a market worried about oil demand in the second half of the year.” Here are the main reasons why production cuts in OPEC+ fail to lift oil prices significantly.

Chinese data raises concerns about the dynamics of the economic recovery for the world’s second-largest oil consumer. “China’s economic recovery following the lifting of coronavirus restrictions has been significantly slower than expected, although Chinese oil demand data has been robust,” Commerzbank analyst Carsten Fritsch said.

Chinese oil demand is catching up to last year’s slowdown, and that resilience is likely to erode once that catch-up ends, the analyst said.

Higher interest rates may be needed to fight inflation, central banks in developed countries have warned. Higher rates reduce consumers’ disposable income and may result in lower transportation costs, which would limit oil demand. They are also weighing on manufacturing activity, and indicators suggest that this slowdown is already underway.

“Factories are struggling around the world: the sector is contracting in Japan, the eurozone, the UK and the US, while it slowed down in China last month”, emphasizes Tamas Varga, analyst at PVM.

Investors therefore do not expect a major recovery in oil demand in the second half of the year. Forecasts predicting that oil stocks will be called upon to meet demand are also being questioned by the markets.

“The International Energy Agency and OPEC continue to forecast withdrawals of around 2 million barrels per day (bpd) (…), the credibility of these forecasts diminishes over time and markets need to be convinced (that demand will hold) for there a meaningful correction can happen,” say Eurasia analysts.

Saudi Arabia’s warning against speculators

Faster-than-expected growth in US oil production put a ceiling on prices. The Energy Information Administration expects U.S. crude oil production to rise 720,000 bpd to 12.61 million bpd this year, with the agency’s previous forecast calling for growth of 640,000 bpd. In 2018, US production reached 10 million bpd.

In 2020, Saudi Energy Minister Prince Abdulaziz bin Salman warned investors who took short positions in oil, saying speculators would be in “hell”.

The minister repeated his warning ahead of the OPEC+ meeting on June 4, saying speculators should “watch out”, a statement interpreted as a signal that OPEC+ would cut output to support prices and punish speculators in the fall. Nevertheless, investors continue to reduce their long positions.

Long positions in Brent and WTI have fallen to 231,000 contracts, just 48,000 contracts more than the low level reached in March 2020, triggered by the “panic collapse of prices under COVID”, according to Saxo Bank analyst Ole Hansen.

(with Reuters)

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