Oil market is extremely fickle. From talks of oil likely to recede to $50/bbl just last month to $100/bl being a likelihood by as early as 3Q 2023 – it has been a rollercoaster of a ride in the last two weeks. If April 2023 was a surprise, when the Opec Plus group announced big production cuts to last the entire 2023 – June 4 decisions can aptly be termed as “Surprise Plus”.
The fact that almost the entire production cut is unilaterally spearheaded by Saudi Arabia tells not every Opec member has a similar view on global demand dynamics. Saudi Arabia has in the past minced no words in letting the world know that the Kingdom will address the balance in a “whatever it takes” strategy. The million barrels a day additional unilateral production cut for 18 months has certainly taken many a pundit by surprise.
First things first. Saudi Arabia intends to fund its ambitious developments plans to reduce reliance on oil revenues at all costs in the next 5-7 years. Unilaterally volunteering for production cuts fits well with their agenda. A tighter oil market is all but certain for at least the remainder of 2023, if not for the entirety of Opec’s production cut extension till end of 2024.
The demand side remains a big question. There are headwinds and there have been false hopes of economic revival from big buyers such as China and the European Union. Talks of a global recession have subsided from a few months ago – but a return to previous highs in global demand may still be distant. But this part of the equation has been more than taken care of by Saudi Arabia, Russia and other Opec partners. The group that accounts for roughly 40 percent of global production has taken away more than 5 percent of global supply in the last 12 months. The demand destruction has been nowhere close.
Demand remaining stressed for the next 18 months is a possible, but highly unlikely scenario. Unlike yesteryears, where the US producers would fill in for the lost barrels of the Opec – this time around, the supply side is expected to stay tight for much longer. This is largely because US producers are operating at near full throttle, close to the all-time highs of 2019 and nearly 10 percent clear year-on-year. US producers have of late focused more on profits than investments or market share – which make a meaningful ramp up in production a highly unlikely scenario in the next year or so.
No matter how hard the Western media tries to suggest otherwise, the Opec Plus members are calling the shots. They may not be aligned on everything, but the biggest players have what it takes to come forward to act alone if need be. And that is where oi market is likely to stay bullish for much longer, unless there is a demand destruction of unthinkable proportions.