Markets Expect Higher Oil Prices After Surprise OPEC Cut

An OPEC flag is seen on the day of an OPEC+ meeting in Vienna, Austria, on Oct. 5, 2022. (Lisa Leutner/Reuters)

Crude oil prices rallied as much as 6 percent on April 3, with both West Texas Intermediate (WTI) and Brent futures soaring above $80 per barrel.

Oil prices climbed in response to the Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, slashing output by 1.16 million barrels per day (bpd) from May to the end of 2023. Saudi Arabia will lead the way with a cut of 500,000 bpd, followed by Iraq (211,000), the United Arab Emirates (144,000), Kuwait (128,000), Kazakhstan (78,000), and Algeria (48,000).

The cartel’s decision is in addition to Russia’s voluntary cut of 500,000 bpd announced in February.

“Accordingly, this will bring the total additional voluntary production adjustments by the above-mentioned countries to 1.66 million b/d,” OPEC said in a statement. “The Meeting noted that this is a precautionary measure aimed at supporting the stability of the oil market.”

OPEC’s decision will tighten an already sensitive energy market, prompting analysts to bolster their price forecasts.

Because some OPEC+ members are producing below the previously agreed quota, the real reduction in physical oil supply is about 800,000 bpd, says Rob Thummel, the portfolio manager of TortoiseEcofin.

Goldman Sachs raised its Brent crude estimate to $95 a barrel by the year’s end and $100 for December 2024. That’s up from the previous projections of $90 and $95, respectively.

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, on Nov. 22, 2019. (Angus Mordant/Reuters)

“OPEC+ has very significant pricing power relative to the past,” Goldman Sachs analysts Daan Struyven and Callum Bruce wrote in a note. “Today’s surprise cut is consistent with their new doctrine to act preemptively because they can without significant losses in market share.”

Last month, the financial institution warned that oil prices could surge to as high as $107, depending on how the group responds to evolving market conditions.

TortoiseEcofin expects oil prices to be in the range of $85 to $95 in 2023.

The company noted that investors might be assessing the situation as OPEC+ anticipates weaker-than-expected demand. However, according to Thummel, consumption levels are predicted to accelerate throughout the year and potentially touch a record high in the second half of the year.

“Global oil inventories are below normal and will likely remain below normal as higher demand and less supply deplete inventories throughout the year,” he said.

John Kirby, spokesman for the U.S. National Security Council, said, “We don’t think cuts are advisable at this moment, given market uncertainty.”

However, Texas Gov. Greg Abbott wrote on Twitter that his state “might just counter that with a 1 million barrel production increase.”

Phil Flynn, a senior market analyst at The Price Futures Group and author of The Energy Report, called the move “a slap in the face to the Biden administration.” After calling Riyadh a pariah state, it is “now back to begging OPEC not to cut production,” he said.

“The Biden administration’s energy policy has discouraged U.S. drilling and production and has allowed OPEC to have the power to snub the U.S. and its oil needs,” he wrote.

According to the Energy Information Administration (EIA), U.S. oil production has been flat so far this year, at 12.2 million bpd, which is still below the pre-pandemic high of 13.1 million bpd.

Separate EIA data confirm that U.S. emergency oil reserves remained unchanged at 371.58 million barrels for the week ending March 24, down nearly 35 percent from the same time a year ago.

Higher Gasoline Prices Coming?

But will the recent developments weigh on gasoline prices?

Before the OPEC announcement, the national average gas price had been inching higher, rising 3.42 percent to $3.506 per gallon, according to the American Automobile Association.

EIA data show that one of the factors for this jump in gas prices has been rebounding domestic demand. For the week ending March 24, U.S. product supplied of finished motor gasoline climbed close to 8 percent year over year to 9.145 million bpd.

In addition, gasoline stocks have tumbled for six consecutive weeks, plunging more than 15 million barrels since the middle of February.

The latest EIA Short-Term Energy Outlook report predicted that domestic gasoline consumption in 2023 and 2024 would jump by roughly 2 percent, with prices averaging $3.36 and $3.11, respectively.