OPEC sets up for a lively meeting

OPEC+ holds it first ministerial meeting of 2023 on June 4. The producers’ alliance switched from monthly to biannual meetings last year though the joint-ministerial monitoring committee has met several times this year. The meeting is likely to be an open debate as there appear to be some points of difference on where OPEC+ will take oil markets in the second half of the year.

In early April several members of the OPEC+ alliance surprised markets by announcing voluntary cuts on top of lower production targets that were announced in October 2022. Saudi Arabia was due to begin cutting an additional 500k b/d of output from the start of May while the UAE would cut 144k b/d along with additional cuts from Iraq, Kuwait, Kazakhstan, Algeria, Oman and Gabon. In total the cuts would amount to about 1.6m b/d when 500k b/d of production cuts pledged from Russia are also added in.

In the weeks leading up to the meeting, messages from OPEC+ ministers have given a hint that there is some dissent within the exporters bloc over the appropriate next steps. Russia’s energy minister, Alexander Novak, said last week that he didn’t think “there will be any new steps” and that the job for OPEC+ now “is monitoring the situation on the market.” However, in a statement released from the Russian government later in the day, Minister Novak seemed to walk those views back somewhat, saying that “decisions can be made if necessary” and that “Russia will participate in discussion along with our partners to derive what is best for the market.” Earlier in the week, Saudi Arabia’s energy minister told speculators in oil markets to “watch out” in response to the building number of short positions in oil futures and options. That would suggest that Saudi Arabia could be open to surprising the market again with additional production cuts.

There are several potential outcomes from the OPEC+ meeting this week.

• Do nothing. Stick to the current production targets for all members (the October 2022 agreed targets for most members and the April 2023 for the voluntary cuts). This is our baseline expectation and we still view this as contributing to a deficit in oil market balances in H2 2023.

• Expand the cuts announced in April 2023 to all members of the OPEC+ alliance. This would mean more members notionally sharing the burden even if the actual cuts end up being smaller than promised as many members within OPEC+ have failed to hit their October 2022 production levels. We would expect a roughly similar outcome for oil market balances in this scenario though with some risk the deficit emerges wider.

• Increase the overall production cuts, either among the voluntary “over-cutters” or across OPEC+ as a whole. While this would certainly mean a deeper market deficit—provided that it is adhered to—expanding production cuts even more is likely to lead to tense negotiations and will raise questions over the integrity of the OPEC+ alliance.

• Walk away from production targets entirely. We think this is an unlikely outcome as it would precipitate a return to the price war several OPEC+ members engaged in during Q1-Q2 2020 that worsened the sell-off in oil prices during the height of the Covid-19 pandemic. However, the frustration among some OPEC+ members on having their investments into upstream capacity handicapped by production quotas may make this an eventuality at some point.

Oil prices have quietly rallied over the last two weeks with Brent futures trading close to USD 77/b at the moment, up from recent lows of around USD 72/b. Markets have been responding more to the negative macro narrative around the global economy—high interest rates, slowing growth, disappointment that China’s economy is not emerging red-hot after dropping its Zero-Covid strategy. But fundamental forces should still exert a strong upward pull on prices over the rest of the year even if the gains may be more incremental than incredible.