OPEC+ tries to regain control over prices
Crude oil prices remain anchored near a cycle low with Brent crude having been hovering around $75 per barrel for the past month. The main driver continues to be concerns about the global growth and demand outlook not only in China – the world’s biggest importer – but also the US and other key consuming regions. This focus has led to selling in the crude oil market from macroeconomic-focused funds seeking a hedge against such a slowdown.
Inadvertently, the market is once again on a collision course with some of the major producers, led by Saudi Arabia, who have yet to see any price supportive impact of the April 2 production cut. Ahead of the OPEC+ meeting on June 4, the temperature has been rising, with the Saudi Energy Minister having become very vocal in his attack on speculators.
OPEC+ wants to show unity but with Russia continuing to sell discounted crude to China and India, two of Saudi Arabia’s major customers, the weekend meeting may spring a surprise or two. Overall, while some additional initiatives to support prices can be announced, we do not expect they will include additional production cuts. The reasons are several but most importantly another cut would a) move market share away from the major Golf producers of Saudi Arabia, UAE and Kuwait to others both inside and outside of OPEC, b) come to soon after the April cut announcement which only come into effect last month and which has yet to be fully felt, and c) OPEC’s own projections still point to a price supportive tightening market into the second half.
In addition, and highlighted in a recent update, the “buy-side” interest across five major crude oil and fuel futures contracts have fallen to the lowest level in more than ten years. And despite seeing a 12% increase to 384k contracts in the latest reporting week to May 23, driven by an increase in the Brent net long and short covering in gas oil, the total remains 43% lower compared with this time last year. Inadvertently, a situation that is now likely to provide some added tailwind through the rebuilding of long positions once the technical and/or fundamental outlook becomes more price friendly.
OPEC’s crude oil production fell by an average of 500,000 barrels per day last month according to a production survey carried out by Bloomberg. As expected, the major Middle East producers with quota all cut production in line with what had been promised at the early April announcement, but the impact was being reduced by rises from producers trailing their quotas and those without saw production increase. Overall, total production was reduced to 28.26 million barrels per day, a 15-month low.