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OPEC+, a group of 24 OPEC and non-OPEC oil producers, announced sharp output cuts Wednesday in a bid to facilitate the recovery of crude prices. The move comes despite calls from Washington to raise oil production to prop up the global economy.
Saudi Arabia, the key OPEC member and the second-biggest oil producer in the world, said output cuts of 2 million barrels per day (bp/d) were needed to address the high-interest rates in the West and the weakening economy. The cuts, set to come into effect in November, were described by the Biden administration as ‘shortsighted.’
Before the announcement, markets were bracing for output cuts in the range of 500,000 bp/d to 2 million bp/d. The decision marks a surprise move by OPEC+, which reduced output by a whopping 10 million bp/d in 2020 amid the coronavirus pandemic. Since then, the group has been gradually easing the cuts, though some member countries struggled to fulfill their quotas.
Direct Blow to Biden’s Efforts of Maintaining Low Gas Prices
In response to the unexpected cuts, the White House issued a statement saying President Biden was “disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.”
The statement added that Biden had instructed the Department of Energy to pump an additional 10 million barrels from the Strategic Petroleum Reserve next month.
“In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices,” the White House said.
The White House views the announced cuts as a geopolitical move and an act of disrespect to Biden who wants to reduce Russia’s revenues and push down crude prices ahead of the midterm elections in November. White House spokesperson Karin Jean-Pierre said the announcement means that OPEC+ is clearly “aligning with Russia.”
Democratic senator Chris Murphy also believes the cuts were a mistake, adding that it is now time for the U.S. to re-evaluate its partnership with Saudi Arabia, the de-facto leader of OPEC+. U.S. representative Tom Malinowski put forward legislation that would withdraw American troops from Saudi Arabia and the United Arab Emirates (UAE).
“I see no reason why we should defend a Saudi dictatorship’s oil fields if it is using its control of oil markets to tank our economy and help our enemies. Our message to MBS should be: ‘If you want to side with Putin, then ask Putin to defend you. And good luck with that,’” he said in a tweet.
Very Low Supply Bullish for Oil Prices
Prior to the announcement, Wall Street banking giant Goldman Sachs weighed in on OPEC+’s considerations to cut oil production, saying the move was justified by the significant slump in oil prices from its recent peaks and the lack of supply flexibility due to low spare capacity and weak shale activity.
In a note to clients, the bank reiterated its bullish oil view given years-long structural issues within the oil market that are inherently bullish for oil prices. Factors, such as poor investor participation, are also a reason to make a major output cut as the move would “increase the carry in oil” and lure back investors who have been betting on the U.S. dollar following the Federal Reserve’s hawkish interest rate cuts.
Last week, Goldman reduced its 2023 oil price outlook citing weak demand and strengthening US Dollar, however, the current global supply headwinds have done nothing but reinforce the bank’s long-term bullish views. Despite cutting forecasts for oil prices, analysts have reiterated their long-term bullish stance on oil prices given supply/demand imbalances.
Goldman also said the cuts would limit the downside to prices if the global economy grows at a slower-than-expected pace next year. Such a move would somewhat compensate for the major exodus of oil investors which has resulted in underperformance of both fundamentals and other cyclical assets, the bank added.
JPMorgan’s commodity strategists are also bullish on oil prices having reiterated their view that oil will return to trade above $100 per barrel in Q4 this year.
“Despite fears over the strength of the global economy, our balances continue to suggest that surpluses observed over summer will turn into deficits starting from October,” JP Morgan said.
