OPEC+ actions risk driving economies towards stagflation
Responsable de la Stratégie Commodity
Résumé: Brent crude oil has reached a fresh ten-month high near $93 while WTI is approaching $90 as OPEC+ production cuts continue to tighten the market thereby raising questions about the group's true intention. Our price outlook needs to reflect the fact that the OPEC+ increasingly looks like being focusing on price optimization instead of a balanced and stable market, and with that in mind, the short-term risk of a Brent move above $95 cannot be ruled out.
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Brent crude oil has reached a fresh ten-month high near $93 while WTI is approaching $90 as OPEC+ production cuts continue to tighten the market thereby raising questions about the group's true intention. Saudi Arabia’s ‘stable and balanced market’ reason for cutting production rings increasingly hallow after OPEC in their monthly report said the market may experience a shortfall of 3.3m b/d in the fourth quarter, potentially driving the biggest deficit in more than a decade. With the EIA meanwhile only predicting a 230 kb/d shortfall, OPEC may find themselves being accused of trying to inflate prices to meet big spending plans among its members
While the IEA, just like the EIA saw a somewhat more moderate but still worrying supply deficit during the fourth quarter, the outlook for crude prices has turned decisively more supportive as it has became increasingly apparent that the main objective of successive OPEC+ production cuts in recent months has been in order to seek higher prices instead of their continued claim that the cuts are in order to keep the market stable and balanced.
Cuts have been led by Saudi Arabia which including its June 1 mb/d “lollipop” has cut its production by around 2 mb/d since last September, and at current export levels the Kingdom would need around $110 per barrel for its revenues to match what they generated before they started cutting production in June. So far this year, according to the IEA, OPEC+ production has fallen by 2 mb/d with overall losses being tempered by sharply higher Iranian flows. Rising prices have supported a production boost from non-OPEC+ suppliers by 1.9 mb/d to a record 50.5 mb/d.
The IEA also highlighted the current tightness is being felt even harder across refined fuel products: “Refinery margins hit an eight-month high in August as refiners struggled to keep up with oil demand growth, especially for middle distillates (diesel and jet fuel). Product cracks and margins reached near-record levels due to unplanned outages, feedstock quality issues, supply chain bottlenecks and low stocks. Sub-optimal crude allocations following embargoes on Russian crude and products and OPEC+ oil supply cuts have kept European and OECD Asian refinery runs well below year-earlier levels”.
Our price outlook needs to reflect the fact that the OPEC+ focus is more about price optimisation than price stability, and with that in mind, the short-term risk of a Brent move above $95 cannot be ruled out. However, while OPEC can control supply, they have limited influence on demand, and with inflationary pressures from higher energy prices on the rise again, the timing of peak rates may suffer another delay while later rate cuts may end up being less than expected. All developments that carry the risk of stagflation, i.e. low growth and stubbornly high inflation.
With OPEC production declining while the estimated production capacity holds steady, the available spare capacity has risen above 6 million barrels per day (Source: Bloomberg). Rising spare capacity and rising crude oil prices rarely go hand in hand that well, but given the current adherence by the major producers to the agreed production limits, the temptation to increase production seems limited at this stage. The high level also reflect the fact that the current tightness is driven by political decisions, not because the world is running out of oil.
In the coming weeks we will be watching several developments that may decide the direction from here:
- The refinery maintenance season is approaching and during this time demand for crude oil will weaken, but refinery margins and with that the cost of diesel and gasoline may remain elevated as supply is reduced.
- Will speculators react in a more forceful manner on the buy side, than seen recently where the main activity was focusing on covering short positions, more than adding new long positions, potentially signaling a conflict between a positive technical outlook against a challenging macroeconomic environment
- How will non-OPEC+ producers, especially in the US, respond to higher prices?
- An estimated daily flow of 0.4 mb/d from Iraqi Kurdistan to Turkey has been disrupted since April amid a diplomatic and legal dispute between Baghdad and Ankara. A solution will help reduce the current focus on tight supply.
- A risk of another US rate hike before yearend may increase should fuel prices continue to rise, potentially giving the dollar a boost while hurting the economic outlook
For now, tight market conditions remains on clear display, with gasoline and especially diesel refinery margins remaining elevated, and through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both command a backwardation above 70 cents per barrel, up from close to flat around the time Saudi production cuts were implemented. The outlook for slower demand growth in 2024 as highlighted by all three forecasters has also supported a rise in one-years spread, examples being Brent where the Dec-23 / Dec-24 spread has reached a backwardation of $8.2 per barrel while the WTI equivalent trades as high as $8.7 per barrel.
Brent has been in a bullish uptrend since July with support at $85.50 - potentially being the bottom of a new higher range supported by OPEC’s active management of supply, and resistance at $94. RSI at 75.5 point to the most stretched price condition since March last year, raising the risk of a short-term pull back, but as long the price holds above $89, the upside momentum is likely to be supported.