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After a delay and apparent ongoing wrangling over baseline quotas, OPEC+ is set to meet on Thursday, Macquarie strategists noted in an oil and gas report sent to Rigzone on Tuesday, outlining that additional cuts and the duration of extra Saudi cuts are “seemingly in play”.
“Given recent Saudi behavior, we believe market ‘consensus’ has tended to default towards OPEC policy that supports price at the expense of volume,” the strategists said in the report.
“Yet, we believe the course of OPEC policy to date, recent path of fundamentals, and global supply response suggest a tactical shift from KSA shouldn’t be dismissed altogether,” they added.
The strategists outlined in the report that, if OPEC+ fails to reach consensus, they would “be surprised to see affairs devolve into a price war scenario”.
“Indeed, with an extra one million barrels per day of voluntary Saudi cuts set to expire at year end 2023, in theory, a ‘middle path’ could emerge wherein KSA provides visibility to supplies returning in 1H 2024, foregoing a short-term price bump, and revisits collective action at a later date,” the strategists said in the report.
“Likewise, while we do not dismiss the ability for KSA to cut deeper and provide market support, we believe the experience of 2023 throws the efficacy of this course into question,” they added.
“Deeper unilateral cuts could support price in the near-term, but risk re-igniting shale appetites into the heart of budgeting season (ahead of what we expect to be a deflationary capital cost environment),” they continued.
“To this end, despite KSA cutting production by ~two million barrels per day, oil markets appear to have found balance at lower price levels than we believe were largely expected,” the strategists went on to state.
The Macquarie strategists noted in the report that, from KSA’s perspective, an ideal outcome might be increased burden-sharing from OPEC+ partners.
“Yet, the challenge for KSA may be achieving this outcome without engaging in brinksmanship (or first accepting a period of weaker prices), as we have seen little willingness from key partners to endure meaningful volumetric sacrifice recently,” the strategists said in the report.
“Put alternatively, despite ~3.3 million barrels per day of OPEC/Saudi cuts announced since October 2022, the IEA estimates OPEC supply has only fallen by 1.6 million barrels per day,” they added.
The strategists stated in the report that, in any event, they believe the market’s primary focus surrounds the continuation of Saudi Arabia’s additional voluntary cuts of one million barrels per day.
“Generally speaking, we believe an extension of these cuts into Q2/Q3 2024 may represent the threshold for this meeting being viewed bullishly,” they said in the report.
“Yet, for perspective, on its own, a continuation of Saudi cuts through December 2024 would still not throw our balances into an FY 2024 deficit,” they added.
“Branching out from this scenario, while additional promised cuts from the broader group or measures targeting enhanced compliance could emerge, we think each are likely to be heavily discounted given recent production performance and incentives,” they continued.
“To the end that these measures keep Saudi oil offline or spur deeper Saudi cuts, they could nevertheless bear fruit,” the strategists went on to state.
In a separate report sent to Rigzone late Tuesday, analysts at Standard Chartered said the OPEC+ meeting involves several layers of energy diplomacy.
“Three are of particular importance: (one) before the meeting can proceed, resolving objections to the baseline adjustments agreed at the previous meeting; (two) achieving a plan for more equitable burden sharing as voluntary cuts are unwound; and (three) considering whether further production adjustment is required beyond the relative output changes necessitated by (two),” the analysts stated in the report.
“Our forecasts imply current OPEC output would balance the market in Q1-2024 (a major improvement on the significant oversupply seen in Q1-2023), but balance would require more supply during the rest of the year,” they added.
“The OPEC Secretariat forecasts are more positive than ours and the IEA forecasts less positive, but none of the models shows significant oversupply in any 2024 quarter,” they continued.
“The focus is then likely to shift to (two), i.e., how to allow Saudi Arabia to scale back its voluntary cuts without unbalancing the market; that is likely to require other producers to both contribute and show output discipline,” the analysts went on to note.
To contact the author, email andreas.exarheas@rigzone.com
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